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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 001-39172
STONEMOR INC.
(Exact name of registrant as specified in its charter)
Delaware
80-0103152
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
3331 Street Road, Suite 200
Bensalem, Pennsylvania
19020
(Address of principal executive offices)
(Zip Code)
(Registrant’s telephone number, including area code): (215) 826-2800
__________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value per share
STON
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large
accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer
☒
Smaller reporting company
☒
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant
to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the
Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of June 30, 2021, the last business day of the registrant’s most recently completed second quarter, the aggregate market value of the common equity held by non-affiliates was approximately $70.8 million based
on $2.62 per share, the closing price per common share as reported on the New York Stock Exchange on June 30, 2021.
At March 21, 2022, the registrant had outstanding 118,337,475 shares of Common Stock, par value $.01 per share.
Table of Contents
FORM 10-K OF STONEMOR INC.
TABLE OF CONTENTS
PART I
Item 1.
Business
3
Item 1A.
Risk Factors
9
Item 1B.
Unresolved Staff Comments
21
Item 2.
Properties
21
Item 3.
Legal Proceedings
23
Item 4.
Mine Safety Disclosures
23
PART II
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
23
Item 6.
[Reserved]
23
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
24
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
40
Item 8.
Financial Statements and Supplementary Data
41
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
89
Item 9A.
Controls and Procedures
89
Item 9B.
Other Information
92
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
92
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
93
Item 11.
Executive Compensation
99
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
107
Item 13.
Certain Relationships and Related Transactions, and Director Independence
108
Item 14.
Principal Accountant Fees and Services
114
PART IV
Item 15.
Exhibits and Financial Statement Schedules
115
Item 16.
Form 10-K Summary
120
Signatures
121
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PART I
ITEM 1. BUSINESS
OVERVIEW
Our History
As used in this Annual Report on Form 10-K (the “Annual Report”), unless the context otherwise requires, references to the terms the “Company,” “StoneMor,”
“we,” “us,” and “our” refer to StoneMor Inc. and its consolidated subsidiaries.
We are filing as a smaller reporting company within the meaning of Rule 12b-2 under the Exchange Act. As a smaller reporting company, we have chosen to
comply with certain scaled or non-scaled financial and non-financial disclosure requirements on an item by item basis.
Recent Developments
Axar Letter
On September 27, 2021, the Company announced that it had received a letter (the “Letter”) dated September 22, 2021 from Axar Capital Management, LP
(“Axar”) in which Axar expressed an interest in pursuing discussions concerning strategic alternatives that may be beneficial to the Company and its various
stakeholders. Axar has engaged Schulte Roth & Zabel LLP as its legal advisor and stated in the Letter that it would engage a financial advisor at the appropriate
time. According to the Letter, Axar expected that any such discussions would be conducted with a special committee of the Board of Directors of the Company
(the “Board”), assisted by financial and legal advisors engaged by such committee. The Letter also stated that any transaction involving Axar arising from such
discussions would be conditioned upon, among other things, approval of the special committee and the Board, the negotiation and execution of mutually
satisfactory definitive agreements and customary terms. The Letter also stated that any transaction structured as a take-private transaction would be subject to a
closing condition that the approval of holders of a majority of the outstanding shares not owned by Axar or its affiliates be obtained. On September 26, 2021, the
Board authorized its Conflicts Committee, which is comprised of independent directors Stephen J. Negrotti, Kevin Patrick and Patricia Wellenbach, to engage in
the discussions contemplated by the Letter, including the authority to engage in discussions concerning and to negotiate the terms and provisions of any strategic
alternative the Conflicts Committee determines to be appropriate in connection with such discussions. Under its charter, the Conflicts Committee has the
authority to reject, approve or recommend that the Board approve any transaction that is a related party transaction, which would include any transaction to
which Axar is a party. The Conflicts Committee has retained independent legal and financial advisors to assist in such discussions. Following receipt of the
Letter and until recently, the Conflicts Committee and its counsel had engaged in discussions with Axar and Axar’s counsel, which evolved to focus on a
potential offer by Axar to acquire the shares of the Company that are not owned by Axar or its affiliates. While these negotiations had been productive, the
Conflicts Committee and Axar had not come to agreement on any price that Axar would pay for such shares or on certain other terms of any transaction, and
there can be no assurance that any agreement would be reached in the future. Negotiations between the Conflicts Committee and Axar were recently tabled in
light of the work undertaken by the Conflicts Committee with respect to the independent review of certain investments by our trusts in which Axar had an
interest. See Part III, Item 13. Certain Relationships and Related Transactions, and Director Independence.
The Conflicts Committee may at any time determine to resume such negotiations, but there can be no assurance that even if such negotiations are resumed, any
agreement with respect to a take-private transaction will be executed or that this or any other transaction will be approved or consummated. The Company does
not undertake any obligation to provide any updates with respect to these matters except as required under applicable law.
Refinancing
On May 11, 2021, the Company issued $400.0 million aggregate principal amount of 8.500% Senior Secured Notes due 2029 (the “2029 Notes”). The gross
proceeds from the sale of the 2029 Notes was $389.9 million, less advisor fees, legal fees, mortgage costs and other closing expenses. The 2029 Notes were
issued pursuant to an indenture (the “2029 Indenture”), dated as of May 11, 2021, by and among the Company, the guarantors named therein and Wilmington
Trust, National Association, as trustee and collateral agent. Substantially concurrently with the closing of the offering of the 2029 Notes, StoneMor Partners L.P.
(the “Partnership”) and Cornerstone Family Services of West Virginia Subsidiary, Inc. (collectively, the “2024 Issuers”) deposited
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from the net cash proceeds from the offering of the 2029 Notes an amount sufficient to fund the full redemption of the outstanding 9.875%/11.500% Senior
Secured PIK Toggle Notes due 2024 (the “2024 Notes”) with Wilmington Trust, National Association (the “2024 Trustee”) as trustee under the Indenture, dated
as of June 27, 2019 (as amended, the “2024 Indenture”), among the 2024 Issuers, the guarantors party thereto and the 2024 Trustee governing the 2024 Notes.
Upon deposit of such funds with the 2024 Trustee, the 2024 Indenture was satisfied and discharged in accordance with its terms. As a result of the satisfaction
and discharge of the 2024 Indenture, the 2024 Issuers and the guarantors of the 2024 Notes, including the Company, have been released from their obligations
with respect to the 2024 Indenture and the 2024 Notes, except with respect to those provisions of the 2024 Indenture that, by their terms, survive the satisfaction
and discharge of the 2024 Indenture. Refer to Note 9 Long-Term Debt to our consolidated financial statements in Part II, Item 8. Financial Statements and
Supplementary Data of this Annual Report.
COVID-19 Pandemic
In December 2019, an outbreak of a novel strain of coronavirus (“COVID-19”) spread worldwide posing public health risks that reached pandemic proportions
(including the effect of variants that have developed, the “COVID-19 Pandemic”). The COVID-19 Pandemic poses a significant threat to the health and
economic wellbeing of the Company’s employees, customers and vendors. The Company’s operations are deemed essential by the state and local governments
in which it operates, with the exception of Puerto Rico, and the Company has been working with federal, state and local government officials to ensure that it
continues to satisfy their requirements for offering the Company’s essential services.
The Company’s top priority is the health and safety of its employees and the families it serves. Since the start of the outbreak in the U.S., the Company’s senior
management team has taken actions to protect its employees and the families it serves, and to support its field locations as they adapt and adjust to the
circumstances resulting from the COVID-19 Pandemic. The operation of all of the Company’s facilities is critically dependent on the employees who staff these
locations. To ensure the wellbeing of the Company’s employees and their families, the Company provided all of its employees with detailed health and safety
literature on COVID-19, such as the industry-specific guidelines from the Centers for Disease Control and Prevention (the “CDC”) for working with the
deceased who were or may have been infected with COVID-19. In addition, the Company’s procurement and safety teams have consistently secured and
distributed supplies to ensure that the Company’s locations have appropriate personal protective equipment (“PPE”) and cleaning supplies to provide its
essential services, as well as updated and developed new safety-oriented guidelines to support daily field operations. These guidelines include reducing the
number of staff present for a service and restricting the number of attendees. The Company also implemented additional safety and precautionary measures as it
concerns the businesses’ day-to-day interaction with the families and communities it serves. The Company’s corporate office employees began working from
home in March 2020 consistent with CDC guidance to reduce the risks of exposure to COVID-19 while still supporting the field operations. The Company did
not experience any significant disruptions to its business as a result of the work from home policies in its corporate office and employees have returned on a
hybrid basis. The Company monitors the CDC guidance on a regular basis, continually reviews and updates its processes and procedures and provides updates to
its employees as needed to comply with regulatory guidelines.
The Company’s marketing and sales team quickly responded to the sales challenges presented by the COVID-19 Pandemic by implementing virtual meeting
options using a variety of web-based tools to ensure that the Company can continue to connect with and meet its customers’ needs in a safe, effective and
productive manner. Some of the Company’s locations provide live video streaming of their funeral and burial services to its customers or provide other
alternatives that respect social distancing, so that family and friends can connect during their time of grief.
Like most businesses world-wide, the COVID-19 Pandemic has impacted the Company financially. At the start of the COVID-19 Pandemic in early 2020, the
Company saw its pre-need sales and at-need sales activity decline as Americans practiced social distancing and crowd size restrictions were put in place.
However, since May 2020, the Company experienced at-need sales growth, and since late 2020, it has experienced pre-need sales growth. The Company
believes the implementation of its virtual meeting tools early on in the COVID-19 Pandemic was one of several key steps that had mitigated this disruption.
Throughout the COVID-19 Pandemic, the Company’s cemeteries and funeral homes have largely remained open and available to serve its families in all the
locations in which it operates to the extent permitted by local authorities and the Company expects that this will continue. The Company has leveraged the
relationships it has made with the families it has served during its response to the COVID-19 Pandemic, which has directly resulted in new sales leads and the
increase in pre-need sales activity. In addition, as community restrictions have eased and the COVID-19 vaccine became more widely available, the Company
has experienced growth in its pre-need cemetery sales, see “Results of Operations” of Part II, Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
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The Company expects the COVID-19 Pandemic could have an adverse effect on its future results of operations and cash flows depending on COVID-19 variants
and case counts. However, the Company cannot presently predict the likely scope and severity of that impact. In the event there are confirmed diagnoses of
COVID-19 within a significant number of its facilities, the Company may incur additional costs related to the closing and subsequent cleaning of these facilities
and the ability to adequately staff the impacted sites. In addition, the Company’s pre-need customers with installment contracts could default on their installment
contracts due to lost work or other financial stresses arising from the COVID-19 Pandemic. Alternatively, in the event that COVID-19 case counts continue to
normalize and variants become less severe, we would expect to see a reduction in the demand for at-need products and services as well as a reduction in pre-
need turning to at-need.
Acquisitions
On January 31, 2022, the Company acquired two cemeteries in Virginia for cash consideration of $5.1 million, pursuant to a definitive agreement signed on
March 23, 2021 with Daly Seven, Inc. to acquire four cemeteries for a total purchase price of $5.4 million, subject to customary working capital adjustments.
The remaining two cemeteries, which are located in North Carolina, are expected to close in the second quarter of 2022.
On March 1, 2022, the Company acquired one funeral home in Florida for a cash purchase price of $1.7 million and on March 15, 2022, the Company acquired
one combination cemetery and funeral home, a separate cemetery and a separate funeral home in West Virginia for a cash purchase price of $11.3 million, in
each case subject to customary working capital adjustments.
Products and Service Offerings
We are currently one of the largest owners and operators of cemeteries and funeral homes in the U.S. As of December 31, 2021, we operated 300 cemeteries in
24 states and Puerto Rico. We own 271 of these cemeteries and we manage or operate the remaining 29 under lease, management or operating agreements with
the nonprofit cemetery companies that own the cemeteries. As of December 31, 2021, we also owned, operated or managed 69 funeral homes, including 33
located on the grounds of cemetery properties that we own, in 15 states and Puerto Rico.
The cemetery products and services that we sell include the following:
Interment Rights
Merchandise
Services
burial lots
burial vaults
installation of burial vaults
lawn crypts
caskets
installation of caskets
mausoleum crypts
grave markers and grave marker bases
installation of other cemetery merchandise
cremation niches
memorials
other service items
perpetual care rights
We sell these products and services both at the time of death, which we refer to as at-need, and prior to the time of death, which we refer to as pre-need. In 2021,
we performed 54,205 burials and sold 21,739 interment spaces (net of cancellations), excluding divested locations. Based on our sales of interment spaces in
2021, our cemeteries have an aggregate average remaining sales life of 282 years.
Our cemetery properties are located in Alabama, Colorado, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Maryland, Michigan,
Mississippi, Missouri, New Jersey, North Carolina, Ohio, Pennsylvania, Puerto Rico, Rhode Island, South Carolina, Tennessee, Virginia, West Virginia and
Wisconsin. Our cemetery operations accounted for approximately 86% and 85% of our revenues in 2021 and 2020, respectively.
The funeral home products and services that we sell include the following:
Merchandise
Services
caskets and related items
family consultation
removal and preparation of remains
insurance products
use of funeral home facilities for visitation and prayer services
Our funeral homes are located in Alabama, Florida, Illinois, Indiana, Kansas, Maryland, Mississippi, Missouri, North Carolina, Ohio, Pennsylvania, Puerto Rico,
South Carolina, Tennessee, Virginia and West Virginia. Our funeral home operations accounted for approximately 14% and 15% of our consolidated revenues in
2021 and 2020, respectively.
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OPERATIONS
Segment Reporting and Related Information
We have two distinct reportable segments, which are classified as Cemetery Operations and Funeral Home Operations segments, both of which are supported by
corporate costs and expenses.
We have chosen this level of organization and disaggregation of reportable segments because: (a) each reportable segment has unique characteristics that set it
apart from the other segment; (b) we have organized our management personnel at these two operational levels; and (c) it is the level at which our chief decision
makers evaluates performance.
Cemetery Operations
As of December 31, 2021, we operated 300 cemeteries. Our Cemetery Operations include sales of cemetery interment rights, merchandise and services and the
performance of cemetery maintenance and other services. An interment right entitles a customer to a burial space in one of our cemeteries and the perpetual care
of that burial space. Burial spaces, or lots, are parcels of property that hold interred human remains. A burial vault is a rectangular container, usually made of
concrete but can also be made of steel or plastic, which sits in the burial lot and in which the casket is placed. The top of the burial vault is buried approximately
18 to 24 inches below the surface of the ground, and the casket is placed inside the vault. Burial vaults prevent ground settling that may create uneven ground
surfaces. Ground settling typically results in higher maintenance costs and potential exposure for accidents on the property. Lawn crypts are a series of closely
spaced burial lots with preinstalled vaults and may include other improvements, such as landscaping, sprinkler systems and drainage. A mausoleum crypt is an
above ground structure that may be designed for a particular customer, which we refer to as a private mausoleum or it may be a larger building that serves
multiple customers, which we refer to as a community mausoleum. Cremation niches are spaces in which the ashes remaining after cremation are stored.
Cremation niches are often part of community mausoleums; although we sell a variety of cremation niches to accommodate our customers’ preferences.
Grave markers, monuments and memorials are above ground products that serve as memorials by showing who is remembered, the dates of birth and death and
other pertinent information. These markers, monuments and memorials include simple plates, such as those used in a community mausoleum or cremation niche,
flush-to-the-ground granite or bronze markers, headstones or large stone obelisks.
One of the principal services we provide at our cemeteries is an "opening and closing," which is the digging and refilling of burial spaces to install the vault and
place the casket into the vault. With pre-need sales, there are usually two openings and closings, where permitted by applicable law. During the initial opening
and closing, we install the burial vault in the burial space. Where permitted by applicable law, we usually perform this service shortly after the customer signs a
pre-need contract. Advance installation allows us to withdraw the related funds from our merchandise trusts, making the amount in excess of our cost to
purchase and install the vault available to us for other uses and eliminates future merchandise trusting requirements for the burial vault and its installation.
During the final opening and closing, we remove the dirt above the vault, open the lid of the vault, place the casket into the vault, close the vault lid and replace
the ground cover. With at-need sales, we typically perform the initial opening and closing at the time we perform the final opening and closing. Our other
services include the installation of other cemetery merchandise and the perpetual care related to interment rights.
Funeral Home Operations
As of December 31, 2021, we owned, operated or managed 69 funeral homes, 33 of which are located on the grounds of cemetery properties that we own. Our
funeral homes offer a range of services to meet a family’s funeral needs, including family consultation, final expense insurance products, the removal and
preparation of remains, provision of caskets and related funeral merchandise, the use of funeral home facilities for visitation, worship and performance of
funeral services and transportation services. Funeral Home Operations primarily generate revenues from at-need sales.
Cremation Products and Services
We operate crematories at some of our cemeteries or funeral homes, but our primary crematory operations are sales of receptacles for cremated remains, such as
urns, and the inurnment of cremated remains in niches or scattering gardens. Cremation products and services usually cost less than traditional burial products
and services and take up less space than burials. We sell cremation products and services on both a pre-need and an at-need basis.
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Seasonality
Although the death care business is relatively stable and predictable, our results of operations may be subject to seasonal fluctuations in deaths due to weather
conditions, illness and public health crises, such as the COVID-19 Pandemic. Generally, more deaths occur during the winter months, primarily resulting from
pneumonia and influenza. In addition, we generally perform fewer initial openings and closings in the winter, as the ground is frozen in many of the areas in
which we operate. We may also experience declines in contracts written during the winter months due to increased inclement weather during which our sales
staff would be unable to meet with customers.
Sales Contracts
Pre-need products and services are typically sold on an installment basis. At-need products and services are generally required to be paid for in full in cash by
the customer at the time of sale. As a result of our pre-need sales, the backlog of unfulfilled pre-need performance obligations recorded in deferred revenues was
$1,056.3 million and $949.2 million at December 31, 2021 and 2020, respectively, excluding amounts classified as held for sale.
Trusts
Sales of cemetery products and services are subject to a variety of state regulations. In accordance with these regulations, we are required to establish and fund
two types of trusts: merchandise trusts and perpetual care trusts, to ensure that we can meet our future obligations. Our funding obligations are generally equal to
a percentage of the sales proceeds or costs of the products and services we sell.
Human Capital
We recognize that our success depends upon the services and capabilities of all of our people. It is built upon our dedicated, passionate and diverse employees
who work and live in the communities we serve. Our goal is to provide a working environment that is welcoming and inclusive, offers competitive pay and
benefits, supports the growth and development of our employees and affirms our corporate values and mission. We are committed to ensuring equal employment
opportunity and that all of our employment decisions, policies and practices are in accordance with applicable federal, state and local anti-discrimination laws.
Our Human Resources team, with oversight from our Board of Directors and its committees, develops and executes programs for compensation and benefits,
onboarding and training and performance management.
All full-time employees are eligible for competitive health and welfare benefits, including medical, dental, vision, disability, life insurance and other benefits.
Full-time employees in the U.S. can participate in our defined contribution plan under Section 401(k) of the Internal Revenue Code, which provides for a
matching contribution of 25 percent of the first three percent of an employee’s contribution. The Company also has a similar type plan for its Puerto Rico
employees.
As of December 31, 2021, we employed 1,831 full-time, 146 part-time and 4 temporary employees. 46 of these full-time employees are represented by unions in
Illinois, New Jersey and Pennsylvania and are subject to collective bargaining agreements that have expiration dates ranging up to September 2024. We believe
that our relationship with our employees is generally favorable. The average tenure of our employees is 5.5 years.
Our current CEO has been in place since July 2018 and our current CFO has been in place since September 2019, following several years of frequent changes in
these positions. Our compensation programs are designed to attract, motivate and retain high quality executive officers who will advance our overall business
strategies and goals to create and return value to our stockholders. Our compensation programs include short-term elements, such as annual base salaries and
cash bonuses, as well as longer term elements such as equity-based awards. We have designed our compensation programs to align the interests of our
management and our stockholders.
Our ability to attract and retain a qualified sales force and other personnel is an important factor in achieving success. Buying cemetery and funeral home
products and services, especially at-need products and services, is very emotional for most customers, so our sales force must be particularly sensitive to our
customers’ needs.
As of December 31, 2021, we employed 373 full-time commissioned salespeople, 48 sales trainees, two part-time commissioned salespeople, 77 salaried sales
managers, 15 commission-only sales managers, 37 outside sales counselors and four full-time sales support employees. We had two divisional vice presidents
and two divisional vice presidents of operations who report directly to our two divisional presidents. Individual salespersons are typically located at the
cemeteries they serve and report directly to the
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cemetery sales manager. Our compensation programs for sales staff are comprised of various plans designed to motivate through a variety of compensation
components including base wages, commissions, bonuses and overrides. Performance is evaluated according to location budget or individual quotas.
We have made a commitment to the ongoing education and training of our sales force and to salesperson retention in order to provide our customers high quality
customer service and in an effort to comply with all applicable laws and requirements. Our salespeople are trained to prioritize our customers’ needs and sell
merchandise and services that are in our customers’ best interests. Our training program includes classroom training at regional training locations, field training,
web-based modules and participation in industry seminars. Additionally, we place special emphasis on training property sales managers, who are key elements
to a successful pre-need sales program.
Marketing
We generate sales leads through various methods including digital marketing, direct mail, websites, funeral follow-up and sales force cold calling, with the
assistance of database mining and other marketing resources. Our marketing department provides sophisticated marketing techniques to focus more effectively
on our lead generation and to direct sales efforts. Sales leads are referred to the sales force to schedule an appointment, either at the customer’s home or at the
cemetery location. In addition, our marketing and sales team quickly responded to the sales challenges presented by the COVID-19 Pandemic by implementing
virtual meeting options using a variety of web-based tools to ensure that we can continue to connect with and meet our customers’ needs in a safe, effective and
productive manner. Some of our locations are providing live video streaming of their funeral and burial services to customers or providing other alternatives that
respect social distancing, so that family and friends can connect during their time of grief.
Competition
Our cemeteries and funeral homes generally serve customers that live within a 10 to 15-mile radius of a property’s location. We face competition from other
cemeteries and funeral homes located within this localized area. Most of these cemeteries and funeral homes are independently owned and operated, and most of
these owners and operators are smaller than we are and have fewer resources than we do. We have historically faced limited competition from the two larger
publicly held death care companies that have U.S. operations — Service Corporation International and Carriage Services, Inc. — as they do not directly operate
cemeteries in the same local geographic areas in which we operate. Furthermore, these companies have historically generated the majority of their revenues
from funeral home operations. Based on the relative levels of cemetery and funeral home operations of these publicly traded death care companies, which are
disclosed in their filings with the Securities and Exchange Commission (the “SEC”), we believe that we are the only publicly held death care company that
focuses a majority of its efforts on Cemetery Operations.
Within a localized area of competition, we compete primarily for at-need sales because, in general, many of the independently owned, local competitors may not
have pre-need sales programs. The number of customers that cemeteries and funeral homes are able to attract is largely a function of reputation and heritage,
although competitive pricing, professional service and attractive, well-maintained and conveniently located facilities are also important factors. The sale of
cemetery and funeral home products and services on a pre-need basis has increasingly been used by many companies as an important marketing tool. Due to the
importance of reputation and heritage, increases in customer base are usually gained over a long period of time.
Competitors within a localized area have an advantage over us if a potential customer’s family members are already buried in the competitor’s cemetery. If
either of the two publicly held death care companies identified above operated, or in the future were to operate, cemeteries within close proximity of our
cemeteries, they may offer more competition than independent cemeteries and may have a competitive advantage over us to the extent they have greater
financial resources available to them due to their size and access to the capital markets.
REGULATION
Our funeral operations are regulated by the Federal Trade Commission (the “FTC”) under Section 5 of the Federal Trade Commission Act and a trade regulation
rule for the funeral industry promulgated thereunder referred to as the “Funeral Rule.” The Funeral Rule defines certain acts or practices as unfair or deceptive
and contains certain requirements to prevent these acts or practices. The preventive measures require a funeral provider to give consumers accurate, itemized
price information and various other disclosures about funeral merchandise and services and prohibit a funeral provider from: (i) misrepresenting legal,
crematory and cemetery requirements; (ii) embalming for a fee without permission; (iii) requiring the purchase of a casket for direct cremation; (iv) requiring
consumers to buy certain funeral merchandise or services as a condition for furnishing other
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funeral merchandise or services; (v) misrepresenting state and local requirements for an outer burial container; and (vi) representing that funeral merchandise
and services have preservative and protective value. Additionally, the Funeral Rule requires the disclosure of mark-ups, commissions, additional charges and
rebates related to cash advance items. Our operations are also subject to regulation, supervision and licensing under numerous federal, state and local laws and
regulations, including those that impose trusting requirements
Our operations are subject to federal, regional, state and local laws and regulations related to environmental protection, such as the federal Clean Air Act, Clean
Water Act, Emergency Planning and Community Right-to-Know Act and Comprehensive Environmental Response (“EPCRA”), Compensation, and Liability
Act, that impose legal requirements governing air emissions, waste management and disposal and wastewater discharges.
We are subject to the requirements of the Occupational Safety and Health Act (“OSHA”) and comparable state statutes. OSHA’s regulatory requirement, known
as the Hazard Communication Standard, and similar state statutes require us to provide information and training to our employees about hazardous materials
used or maintained for our operations. We may also be subject to Tier 1 or Tier 2 Emergency and Hazardous Chemical Inventory reporting requirements under
the EPCRA, depending on the amount of hazardous materials maintained on-site at a particular facility. We are also subject to the federal Americans with
Disabilities Act and similar laws, which, among other things, may require that we modify our facilities to comply with minimum accessibility requirements for
disabled persons.
We take various measures to comply with the Funeral Rule and all other laws and regulations to which we are subject, and we believe we are substantially in
compliance with these existing laws and regulations.
Federal, state and local legislative bodies and regulatory agencies frequently propose new laws and regulations, some of which could have a material effect on
our operations and on the deathcare industry in general. We cannot accurately predict the outcome of any proposed legislation or regulation or the effect that any
such legislation or regulation might have on us.
Available Information
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports with the SEC. The SEC
maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with
the SEC, including us.
We maintain an Internet website with the address of http://www.stonemor.com. The information on this website is not, and should not be considered, part of this
Annual Report and is not incorporated by reference into this Annual Report. This website address is only intended to be an inactive textual reference. Copies of
our reports filed with, or furnished to, the SEC on Forms 10-K, 10-Q and 8-K, and any amendments to such reports, are available for viewing and copying at
such Internet website, free of charge, as soon as reasonably practicable after filing such material with, or furnishing it to, the SEC.
ITEM 1A. RISK FACTORS
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations
and assumptions that we believe are reasonable regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the
economy and other future conditions. All statements, other than statements of historical information, should be deemed to be forward-looking statements. The
words “may,” “will,” “estimate,” “believe,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could” or other similar expressions are
intended to identify forward-looking statements, which are generally not historical in nature. Because forward-looking statements relate to the future, they are
subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results
and financial condition may differ materially from those indicated in the forward-looking statements.
Important factors that could cause actual results to differ materially from our expectations include, but are not limited to, the risks set forth below. The risks
described below are those that we have identified as material and is not an exhaustive list of all the risks we face. There may be others that we have not
identified or that we have deemed to be immaterial. All forward-looking statements made by us or on our behalf are qualified by the risks described below. If
any events occur that give rise to the following risks, our business, financial condition or results of operations could be materially and adversely impacted. These
risk factors, some of which are beyond our control or not readily predictable, should be read in conjunction with other information set forth in this Annual
Report, including our consolidated financial statements and the related notes. Investors are cautioned not to put undue reliance on our forward-looking
statements.
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RISKS RELATED TO OUR INDEBTEDNESS
Our level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our debt obligations.
As of December 31, 2021, we had $400.8 million of total debt (not including capital lease obligations), consisting of $400.0 million of the 2029 Notes and $0.8
million of financed insurance and vehicles. Our indebtedness requires significant interest and principal payments. Subject to certain limitations and the
satisfaction of certain conditions contained in the 2029 Indenture, we may also be permitted to incur substantial additional debt from time to time to finance
working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our high level of debt could increase.
Our level of indebtedness could have important consequences to us, including:
•
continuing to require us to dedicate a substantial portion of our cash flow from operations to the payment of the principal of and interest on our
indebtedness, thereby reducing the funds available for operations and any future business opportunities;
•
limiting flexibility in planning for, or reacting to, changes in our business or the industry in which we operate;
•
placing us at a competitive disadvantage compared to our competitors that have less indebtedness;
•
making us more susceptible to changes in credit ratings, which could impact our ability to obtain financing in the future and increase the cost of such
financing;
•
increasing our vulnerability to adverse general economic or industry conditions; and
•
limiting our ability to obtain additional financing to fund working capital, capital expenditures, acquisitions or other general corporate requirements
and increasing our cost of borrowing.
In addition, the 2029 Indenture prevents us from incurring additional debt or liens for working capital expenditures, acquisitions or other purposes (subject to
very limited exceptions). Our ability to make payments on and to refinance our indebtedness will depend on our ability to generate cash in the future from
operations, financings or asset sales. Our ability to repay our indebtedness and comply with the restrictive covenants will be dependent on, among other things,
the successful execution of our strategic plans. If we require additional capacity under the restrictive covenants to successfully execute our strategic plans, we
will need to seek the required consent from a majority of the holders of the 2029 Notes. No assurances can be given that we will be successful in obtaining such
consent, and any failure to do so will have a material adverse effect on our business operations and our financial results.
Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We may
not generate sufficient funds to service our debt and meet our business needs, such as funding working capital or the expansion of our operations. If we are not
able to repay or refinance our debt as it becomes due, we may be forced to take certain actions, including reducing spending on day-to-day operations, reducing
future financing for working capital, capital expenditures and general corporate purposes, selling assets or dedicating an unsustainable level of our cash flow
from operations to the payment of principal and interest on our indebtedness. The trustee or the holders of the 2029 Notes could also accelerate amounts due in
the event that we default, which could potentially trigger a default or acceleration of the maturity of our debt.
In addition, our ability to withstand competitive pressures and to react to changes in our industry could be impaired, and our leverage could put us at a
competitive disadvantage compared to our competitors that are less leveraged, as these competitors could have greater financial flexibility to pursue strategic
acquisitions and secure additional financing for their operations. Our leverage could also impede our ability to withstand downturns in our industry or the
economy in general.
Despite our current indebtedness level, we and any of our existing or future subsidiaries may still be able to incur substantially more debt, which could
exacerbate the risks associated with our substantial leverage.
We and any of our existing and future subsidiaries may be able to incur substantial additional indebtedness in the future. Although the terms of the 2029
Indenture contains limitations on our ability to incur additional indebtedness, these restrictions will be subject to a number of qualifications and exceptions We
have the ability under the 2029 Indenture to incur up to $40 million of additional senior secured debt and we anticipate entering into a revolving credit facility in
that amount in the second quarter of 2022. If new debt is added to our or any of our existing and future subsidiaries’ current debt levels, the related risks that we
now face could be exacerbated.
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We may not be able to generate sufficient cash to service all of our indebtedness or repay such indebtedness when due, including the 2029 Notes, and may be
forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or to refinance our debt obligations, including the 2029 Notes, depends on our financial condition and operating
performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control,
including the effects of the COVID-19 Pandemic. We cannot assure you that our business will generate sufficient cash flows from operating activities, or that
future borrowings will be available in an amount sufficient to enable us to pay the principal of, and premium, if any, and interest on, our indebtedness, including
the 2029 Notes, or any portion of any of the foregoing, or to fund our other liquidity needs.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital
expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness, including the 2029 Notes. Our ability to restructure or
refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher
interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of the 2029 Indenture
restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a
timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. In the absence of such
operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt
service and other obligations. The 2029 Indenture restricts our ability to dispose of assets and use the proceeds from the disposition. We may not be able to
consummate those dispositions or to obtain the proceeds that we could realize from them and these proceeds may not be adequate to meet any debt service
obligations then due. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.
The 2029 Indenture imposes significant operating and financial restrictions, which may prevent us from pursuing certain business opportunities and taking
certain actions.
The 2029 Indenture contains various covenants that limit our ability to engage in specified types of transactions. These covenants limit our and our restricted
subsidiaries’ ability to, among other things:
•
incur additional indebtedness or issue certain preferred shares;
•
pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;
•
make certain investments;
•
transfer or sell certain assets, including capital stock of our restricted subsidiaries;
•
create or incur liens;
•
consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
•
agree to dividend or other payment restrictions affecting our restricted subsidiaries;
•
change the business we conduct;
•
withdraw any monies or other assets from, or make any investments of, our trust funds; and
•
enter into certain transactions with our affiliates.
Our ability to comply with these covenants can be affected by events beyond our control, and we may not be able to satisfy them.
OTHER FINANCIAL RISKS
Pre-need sales typically generate low or negative cash flow in the periods immediately following sales, which could adversely affect our liquidity and cash flow.
When we sell cemetery merchandise and services on a pre-need basis, upon cash collection, we pay commissions on the sale to our salespeople and are required
by state law to deposit a portion of the sales proceeds into a merchandise trust. In addition, most of our customers finance their pre-need purchases under
installment contracts payable over a number of years. Depending on the
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trusting requirements of the states in which we operate, the applicable sales commission rates and the amount of the down payment, our cash flow from sales to
customers through installment contracts is typically negative until we have collected the related receivable or until we purchase the products or perform the
services and are permitted to withdraw funds we have deposited in the merchandise trust. To the extent we increase pre-need sales, state trusting requirements
are increased or we delay the performance of the services or delivery of merchandise we sell on a pre-need basis, our cash flow from pre-need sales may be
further reduced, and our liquidity could be adversely affected.
We have identified material weaknesses in our internal control over financial reporting and determined that our disclosure controls and procedures were not
effective which could, if not remediated, result in additional material misstatements in our financial statements and may adversely affect our liquidity, the
market for our common shares and our business.
Our management is responsible for establishing and maintaining adequate disclosure controls and procedures and internal control over our financial reporting, as
defined in Rules 13a- 15(e) and 13a-15(f), respectively, under the Exchange Act. Effective internal controls are necessary for us to provide timely, reliable and
accurate financial reports, identify and proactively correct any deficiencies, material weaknesses or fraud and meet our reporting obligations. As disclosed in
Part II, Item 9A. Controls and Procedures of this Annual Report, management identified material weaknesses in our internal control over financial reporting and
concluded our disclosure controls and procedures were not effective as of December 31, 2021. A material weakness is defined as a deficiency, or a combination
of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim
financial statements will not be prevented or detected on a timely basis. Our independent registered public accounting firm also expressed an adverse opinion on
the effectiveness of our internal control over financial reporting.
As discussed in Part II, Item 9A. Controls and Procedures of this Annual Report, our remediation efforts to address the material weaknesses in internal control
over financial reporting and ineffective disclosure controls and procedures are ongoing and had been delayed primarily due to management turnover and the
impact of the COVID-19 Pandemic. We currently expect the remediation of the identified material weaknesses to be completed during 2022. If our planned
remediation actions are not successfully implemented or we encounter other difficulties, we might incur significant unexpected expenses in order to perform the
Section 404 evaluation and our ability to file timely with the SEC may be adversely impacted. In addition, if our remedial measures are insufficient, or if
additional material weaknesses or significant deficiencies in our internal controls occur in the future, we could be required to further restate our financial results,
which could materially and adversely affect our business, results of operations and financial condition, restrict our ability to access the capital markets, require
us to expend significant resources to correct the material weaknesses or deficiencies, harm our reputation or otherwise cause a decline in investor confidence.
The financial condition of third-party insurance companies that fund our pre-need funeral contracts and the amount of benefits those policies ultimately pay
may impact our financial condition, results of operations or cash flows.
Where permitted, customers may arrange their pre-need funeral contract by purchasing a life insurance or annuity policy from third-party insurance companies.
The customer/policy holder assigns the policy benefits to our funeral home to pay for the pre-need funeral contract at the time of need. For the sales of pre-need
funeral contracts funded through life insurance policies, we receive commissions from third-party insurance companies. Additionally, there is a death benefit
associated with the contract that may vary over the contract life. There is no guarantee that the value of the death benefit will increase or cover future increases
in the cost of providing a funeral service. If the financial condition of the third-party insurance companies were to deteriorate materially because of market
conditions or otherwise, there could be an adverse effect on our ability to collect all or part of the proceeds of the life insurance or annuity policy, including any
increase in the death benefit. Failure to collect such proceeds could have a material adverse effect on our financial condition, results of operations or cash flows.
Our liquidity may be impacted by our ability to negotiate bonding arrangements with third-party insurance companies.
Where permitted, we have entered into and may continue to enter into bonding arrangements with insurance companies, whereby pre-need performance
obligations otherwise required to be trusted may be insured through a process called bonding. In the event that we are unable to deliver on bonded pre-need
contract sales at the time of need, the insurance company will provide cash sufficient to deliver goods for the respective pre-need sale item. On an ongoing basis,
we must negotiate acceptable terms of these various bonding arrangements, and the insurance companies have required us to provide cash collateral from time to
time under certain circumstances. To the extent we are unable to negotiate acceptable terms for such arrangements and thus are no longer able to maintain
existing bonds, we would need to deposit the corresponding amounts in the merchandise trusts. We may be required to provide additional cash collateral from
time to time under certain circumstances. Any of these actions would have an adverse impact on our liquidity.
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Our ability to use our Net Operating Losses and other tax assets is uncertain.
As of December 31, 2021, we had net operating loss (“NOL”) carryforwards of approximately $477.0 million for U.S. federal income tax purposes and
substantially similar tax assets at the federal and state levels. Along with other previous transfers of our interests, we believe that certain recapitalization
transactions completed in 2019 (the “Recapitalization Transactions”) caused a “change of control” for income tax purposes, which may significantly limit our
ability to use NOLs and certain other tax assets to offset future taxable income, possibly reducing the amount of cash available to us to satisfy our obligations.
The “change of control” rules limit the annual net operating loss deduction in a given year to an amount based on the value of the Company on the change date
multiplied by the federal tax exempt bond rate. This makes it more likely for the Company to pay some amount of income tax in the years it has positive taxable
income. This limitation also makes it more likely for NOL carryovers to expire unutilized.
If the IRS makes audit adjustments to the Partnership’s income tax returns for 2018 or 2019 tax years, it (and some states) may assess and collect any taxes
(including any applicable penalties and interest) resulting from such audit adjustment directly from us, in which case our financial condition could be adversely
affected.
Pursuant to the Bipartisan Budget Act of 2015, for our 2018 and 2019 tax years, if the IRS makes audit adjustments to the Partnership’s income tax returns, it
(and some states) may assess and collect any taxes (including any applicable penalties and interest) resulting from such audit adjustment directly from us. To the
extent possible under the new rules, we may elect to either pay the taxes (including any applicable penalties and interest) directly to the IRS or, if we are
eligible, issue a revised Schedule K-1 to each holder of the Partnership’s common units during the applicable year with respect to an unaudited and adjusted
return. Although we may elect to have such unitholders take such audit adjustment into account in accordance with their interests in the Partnership during the
tax year under audit, there can be no assurance the election will be practical, permissible or effective in all circumstances. As a result, StoneMor Inc. may be
required to pay the necessary taxes, which would mean that our current stockholders may indirectly bear some or all of the impact of the tax liability resulting
from such audit adjustment, even if they did not own units in us during the tax year under audit. If, as a result of any such audit adjustment, we are required to
make payments of taxes, penalties and/or interest, our financial condition could be adversely affected. These rules were not applicable for tax years beginning on
or prior to December 31, 2017.
Because fixed costs are inherent in our business, a decrease in our revenues can have a disproportionate effect on our cash flow and profits.
Our business requires us to incur many of the costs of operating and maintaining facilities, land and equipment regardless of the level of sales in any given
period. For example, we must pay salaries, utilities, property taxes and maintenance costs on our cemetery properties and funeral homes regardless of the
number of interments or funeral services we perform. If we cannot decrease these costs significantly or rapidly when we experience declines in sales, declines in
sales can cause our margins, profits and cash flow to decline at a greater rate than the decline in our revenues.
Economic, financial and stock market fluctuations could affect future potential earnings and cash flows and could result in future intangible asset and long-lived
asset impairments.
In addition to an annual review, we assess the impairment of our intangible assets and other long-lived assets whenever events or changes in circumstances
indicate that the carrying value may be greater than fair value and therefore not fully recoverable. Recoverability of these assets is measured by a comparison of
the carrying amount of the assets to the future net cash flow, undiscounted and without interest, expected to be generated by the assets. Factors that could trigger
an interim impairment review include, but are not limited to, a significant decline in the market value of our stock or debt values, significant under-performance
relative to historical or projected future operating results, and significant negative industry or economic trends. Based on the results of our impairment tests of
our long-lived assets throughout 2021, we concluded that none of our long-lived assets were impaired.
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OPERATIONAL RISKS
Cemetery burial practice claims could have a material adverse impact on our financial results, and unfavorable publicity resulting from claims, or otherwise,
could affect our reputation and business.
Our cemetery practices have evolved and improved over time. Most of our cemeteries have been operating for decades and some have in the past used practices
and procedures that are outdated in comparison to today’s standards. When cemetery disputes occur, we have in the past been, and may in the future be, subject
to litigation and liability for improper burial practices, including:
•
burial practices of a different era that are judged today in hindsight as being outdated; and
•
alleged violations of our practices and procedures by one or more of our associates.
In addition, since we acquired most of our cemeteries from third parties, we have in the past been, and may in the future be, subject to litigation and liability
based upon actions or events that occurred before we acquired or managed the cemeteries. Claims or litigation based upon our cemetery burial practices could
have a material adverse impact on our financial condition, results of operations and cash flows.
Since our operations relate to life events that are emotionally stressful for our client families, our business is dependent on customer trust and confidence.
Unfavorable publicity about our business generally or in relation to any specific location could affect our reputation and customers’ trust and confidence in our
products and services, thereby having an adverse impact upon our sales and financial results.
Our business may be affected by rising inflation and other issues that affect consumer spending.
Our results of operations are affected by the level of consumer spending and, therefore, by changes in the economic factors that impact consumer spending.
Although the rate of inflation has been low in recent years, we are currently experiencing a significant rise in inflation. This and other economic conditions or
events, such as a contraction in the financial markets, higher interest rates, high unemployment levels, decreases in consumer disposable income, unavailability
of consumer credit, higher consumer debt levels, higher fuel, energy and other commodity costs and product cost increases, could reduce or shift consumer
spending generally, which could cause our customers to spend less on the merchandise and services they purchase from us. Reduced consumer spending may
also result in reduced demand for our pre-need products and services. A reduction or shift in consumer spending could negatively impact our business, results of
operations and financial condition.
Our ability to generate pre-need sales depends on a number of factors, including sales incentives and local and general economic conditions.
Significant declines in pre-need sales would reduce our backlog and revenue and could reduce our future market share. On the other hand, a significant increase
in pre-need sales could have a negative impact on cash flow as a result of commissions and other costs incurred initially without corresponding revenue.
We are continuing to refine the mix of service and product offerings in both our funeral and cemetery segments, including changes in our sales commission and
incentive structure. These changes could cause us to experience declines in pre-need sales in the short-run. In addition, economic conditions at the local or
national level could cause declines in pre-need sales either as a result of less discretionary income or lower consumer confidence. Declines in pre-need cemetery
property sales reduce current revenue, and declines in other pre-need sales would reduce our backlog and future revenue and could reduce future market share.
Our failure to attract and retain qualified sales personnel and management could have an adverse effect on our business and financial condition.
Our ability to attract and retain a qualified sales force and other personnel is an important factor in achieving future success. Buying cemetery and funeral home
products and services, especially at-need products and services, is very emotional for most customers, so our sales force must be particularly sensitive to our
customers’ needs. We cannot assure our stockholders that we will be successful in our efforts to attract and retain a skilled sales force. If we are unable to
maintain a qualified and productive sales force, our revenues may decline and our cash available for distribution may decrease.
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Our success also depends upon the services and capabilities of our management team. Management establishes the “tone at the top” by which an environment of
ethical values, operating style and management philosophy is fostered. The inability of our senior management team to maintain a proper “tone at the top” or the
loss of services of one or more members of senior management, as well as the inability to attract qualified managers or other personnel could have a material
adverse effect on our business, financial condition and results of operations. We may not be able to locate or employ on acceptable terms qualified replacements
for senior management or key employees if their services were no longer available. We do not maintain key employee insurance on any of our executive
officers.
We rely significantly on information technology and any failure, inadequacy, interruption or security lapse of that technology, including any cybersecurity
incidents, could harm our ability to operate our business effectively.
Our ability to manage and maintain our internal reports effectively and integrate new business acquisitions depends significantly on our operational technology
platform and other information systems. Some of our information technology systems may experience interruptions, delays or cessations of service or produce
errors in connection with ongoing systems implementation work. Cybersecurity attacks in particular are evolving and include, but are not limited to, malicious
software, attempts to gain unauthorized access to data and other electronic security breaches that could lead to disruptions in systems and corruption of data. The
failure of our systems to operate effectively or to integrate with other systems or a breach in security or other unauthorized access of these systems may also
result in reduced efficiency of our operations and could require significant capital investments to remediate any such failure, problem or breach and to comply
with applicable regulations, all of which could adversely affect our business, financial condition and results of operations.
Any failure to maintain the security of the information relating to our customers, their loved ones, our employees and our vendors could damage our reputation,
cause us to incur substantial additional costs and make us subject to litigation, all of which could adversely affect our operating results, financial condition or
cash flow.
In the ordinary course of our business, we receive certain personal information, in both physical and electronic formats, about our customers, their loved ones,
our employees and our vendors. In addition, our online operations depend upon the secure transmission of confidential information over public networks,
including information permitting electronic payments. We maintain security measures and data backup systems to protect, store and prevent unauthorized access
to such information. However, it is possible that computer hackers and others (through cyberattacks, which are rapidly evolving and becoming increasingly
sophisticated, or by other means) might defeat our security measures in the future and obtain the personal information of customers, their loved ones, our
employees and our vendors that we hold. In addition, our employees, contractors or third parties with whom we do business may attempt to circumvent our
security measures to misappropriate such information and may purposefully or inadvertently cause a breach, corruption or data loss involving such information.
A breach of our security measures or failure in our backup systems could adversely affect our reputation with our customers and their loved ones, our employees
and our vendors, as well as our operations, results of operations, financial condition and cash flow. It could also result in litigation against us or the imposition of
penalties. Moreover, a security breach could require that we expend significant additional resources to upgrade further the security measures that we employ to
guard such important personal information against cyberattacks and other attempts to access such information and could result in a disruption of our operations.
Litigation or legal proceedings could expose us to significant liabilities and damage our reputation.
From time to time, we are party to various claims and legal proceedings, including, but not limited to, claims and proceedings regarding employment, cemetery
or burial practices and other litigation. As set forth more fully in Part I, Item 3. Legal Proceedings and Part II, Item 8. Financial Statements and Supplementary
Data, Note 14 Commitments and Contingencies of this Annual Report, we are currently subject to state law claims that certain of our officers and directors
breached their fiduciary duty to the Company. We could also become subject to additional claims and legal proceedings relating to the factual allegations made
in these actions. We are also subject to class or collective actions under the wage and hours provisions of the Fair Labor Standards Act and state wage and hour
laws, including, but not limited to, national and state class or collective actions, or putative class or collective actions.
Adverse outcomes in some or all of our pending cases may result in significant monetary damages or injunctive relief against us, as litigation and other claims
are subject to inherent uncertainties. Any such adverse outcomes, in pending cases or other lawsuits that may arise in the future, could have a material adverse
impact on our financial position, results of operations and cash flow. While we hold insurance policies that may reduce cash outflows with respect to adverse
outcomes of certain litigation matters, these insurance policies exclude certain claims, such as claims arising under the Fair Labor Standards Act.
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In addition, litigation claims and legal proceedings could demand substantial amounts of our management’s time, resulting in the diversion of our management
resources from effectively managing our business operations, and costs to defend litigation claims and legal proceedings could be material. Any adverse
publicity resulting from allegations made in litigation claims or legal proceedings may also adversely affect our reputation. All these factors could negatively
affect our business and results of operations.
Broad-based business or economic disruptions caused by global health concerns, including the COVID-19 Pandemic, and other crises could adversely affect
our business, financial condition, profitability or cash flows.
Global health concerns, such as the COVID-19 Pandemic, could result in social, economic and labor instability that adversely affect our employee and customer
relationships, pre-need sales activity, the value of our trust investments and associated funding obligations, and in so doing adversely affect our business,
financial condition, results of operations and cash flows. For example, governmental actions restricting public gatherings and interaction may result in our
customers deferring making purchase decisions regarding pre-need arrangements or delaying holding funeral services and may result in our inability to operate
our cemeteries and funeral homes, which would have an adverse impact on our business, financial condition, results of operations and cash flows. Although our
cemeteries and funeral homes have largely remained open and available to serve our families in all the locations in which we operate to the extent permitted by
local authorities, throughout the COVID-19 Pandemic, this may not continue. We have experienced limited location closures due to COVID-19 cases, required
quarantines and cleanings. In addition, our pre-need customers with installment contracts could default on their installment contracts due to lost work or other
financial stresses arising from the COVID-19 Pandemic. Having to adjust our policies and practices to respond to global health concerns could also result in
increased operating expenses. We continue to monitor this ongoing public health crisis and its impact on our employees, customers and vendors and the overall
economic environment within the U.S. and worldwide, but we cannot presently predict the full scope and severity of the disruptions caused by the COVID-19
Pandemic on our business, financial condition, results of operations and cash flows.
We are subject to legal restrictions on our marketing practices that could reduce the volume of our sales, which could have an adverse effect on our business,
operations and financial condition.
The enactment or amendment of legislation or regulations relating to marketing activities may make it more difficult for us to sell our products and services. For
example, the federal “do not call” legislation has adversely affected our ability to market our products and services using telephone solicitation, by limiting
whom we may call and increasing our costs of compliance. As a result, we rely heavily on direct mail marketing and telephone follow-up with existing contacts.
Additional laws or regulations limiting our ability to market through direct mail, over the telephone, through Internet and e-mail advertising or door-to-door may
make it difficult to identify potential customers, which could increase our costs of marketing. Both increases in marketing costs and restrictions on our ability to
market effectively could reduce our revenues and could have an adverse effect on our business, operations and financial condition, as well as our ability to
generate cash to pay our debts.
STRATEGIC RISKS
Our ability to execute our strategic plans depends on many factors, some of which are beyond our control.
Our strategic plans are focused on efforts to revitalize the business, grow our revenue and manage our operating and non-recurring operating expenses. Many of
the factors that impact our ability to execute our strategic plans, such as the number of deaths and general economic conditions, are beyond our control. Changes
in operating conditions, such as supply disruptions and labor disputes, could negatively impact our operations. If we are unable to leverage scale to drive cost
savings, productivity improvements, pre-need production or anticipated earnings growth, or if we are unable to deploy capital to maximize stockholder value,
our financial performance could be affected. If we are unable to identify acquisitions and/or divestitures as planned or to realize expected synergies and strategic
benefits, our financial performance could also be affected. We cannot give assurance that we will be able to execute any or all of our strategic plans. Failure to
execute any or all of our strategic plans could have a material adverse effect on our financial condition, results of operations, and cash flows. Refer to “General
Trends and Outlook” of Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for a discussion of our
business strategies.
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Failure to effectively identify and manage acquisitions and divestitures could have an adverse effect on our results of operations.
We continue to evaluate acquisition opportunities that could strategically fit our business objectives. Refer to “Recent Events” of Part II, Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations for a discussion of our recently completed acquisitions. However, we may not be
successful in identifying and acquiring additional cemeteries or funeral homes on terms favorable to us or at all and may face competition from other death care
companies in making acquisitions. In addition, if we complete acquisitions, we may encounter various associated risks, including:
•
the failure to achieve our strategic objectives or performance expectations, for example due to the inability to integrate an acquired business into
our operations;
•
over-valuation of the companies or assets that we acquire;
•
disputes that may occur with the sellers;
•
failure to effectively monitor compliance with corporate policies and/or regulatory requirements;
•
diversion of management’s attention from other aspects of our business;
•
unanticipated risks or liabilities associated with the acquired company’s operations; and
•
insufficient indemnification from the sellers for liabilities incurred by the acquired companies prior to the acquisitions.
These risks could have a material adverse effect on our operations and financial performance. Moreover, if we acquire cemeteries that do not have an existing
pre-need sales program or a significant amount of pre-need products and services that have been sold but not yet purchased or performed, the operation of the
cemetery and implementation of a pre-need sales program after acquisition may require significant amounts of working capital. Additionally, we could incur
impairment losses on goodwill and intangible assets with an indefinite life or restructuring charges as a result of acquisitions we make.
In addition, during 2021 and 2020, we completed several divestitures as part of an asset sale program designed to divest assets at attractive multiples, reduce
debt levels and improve cash flow and liquidity. However, we may not be successful in identifying additional divestiture opportunities on terms acceptable to us
and the gains or losses on the divestiture of, or lost operating income from, such assets may affect our earnings. For the year ended December 31, 2021, our Loss
from continuing operations before income taxes included a Loss on sale of business and other impairments of $2.3 million.
If our execution and implementation of acquisitions and divestitures is unsuccessful, our financial condition, results of operations and cash flow could be
adversely affected. We may also incur asset impairment charges related to divestitures or acquisitions that would reduce our earnings.
RISKS RELATED TO TRUST FUNDS
Our merchandise and perpetual care trust funds own investments in equity securities, fixed income securities, mutual funds and master limited partnerships,
which are affected by financial market conditions that are beyond our control.
Pursuant to state law, a portion of the proceeds from pre-need sales of merchandise and services is put into merchandise trusts until such time that we meet the
requirements for releasing trust principal, which is generally delivery of merchandise or performance of services. In addition, the 2029 Indenture also provides
certain limitations on how the assets in the merchandise trusts may be invested. Generally, a majority of the investment earnings generated by the assets in the
merchandise trusts, including realized gains and losses, are deferred until the associated merchandise is delivered or the services are performed.
Also, pursuant to state law, a portion of the proceeds from the sale of cemetery property is required to be paid into perpetual care trusts. The perpetual care trust
principal does not belong to us and must remain in this trust in perpetuity while interest and dividends may be released and used to defray cemetery maintenance
costs.
These trust assets are managed by a trustee, which is advised by Cornerstone, our registered investment adviser subsidiary, all under the oversight of the Trust
and Compliance Committee of our Board. Cornerstone has engaged three sub-advisers, including Axar, to assist Cornerstone in providing investment
recommendations with respect to certain trust assets, on a non-discretionary basis. There is no guarantee that the trustee will achieve its objectives and deliver
adequate returns, and the trustee’s investment choices may result in losses. In addition, our returns on these investments are affected by financial market
conditions that are beyond our control. If the investments in our trust funds experience significant declines, there could be insufficient funds in the
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trusts to cover the costs of delivering services and merchandise. Pursuant to state law, we may be required to cover any such shortfall in merchandise trusts with
cash flows from operations, which could have a material adverse effect on our financial condition, results of operations or cash flows. A substantial portion of
our revenue is generated from investment returns that we realize from merchandise and perpetual care trusts. Unstable economic conditions have, at times,
caused us to experience declines in the fair value of the assets held in these trusts. Moreover, future cash flows could be negatively impacted if we are forced to
liquidate any such investments that are in an impaired position.
If the fair market value of these trusts, plus any other amount due to us upon delivery of the associated contracts, were to decline below the estimated costs to
deliver the underlying products and services, we would be required to record a charge to earnings to record a liability for the expected losses on the delivery of
the associated contracts.
For more information related to our trust investments, see Note 6 Merchandise Trusts and Note 7 Perpetual Care Trusts to our consolidated financial statements
in Part II, Item 8. Financial Statements and Supplementary Data of this Annual Report.
We may be required to replenish our funeral and cemetery trust funds in order to meet minimum funding requirements, which would have a negative effect on
our earnings and cash flow.
In certain states, we have withdrawn allowable distributable earnings from our merchandise trusts, including gains prior to the maturity or cancellation of the
related contract. Additionally, some states have laws that either require replenishment of investment losses under certain circumstances or impose various
restrictions on withdrawals of future earnings when trust fund values drop below certain prescribed amounts. In the event of realized losses or market declines,
we may be required to deposit portions or all of these amounts into the respective trusts in some future period. As of December 31, 2021, we had unrealized
losses of approximately $0.5 million in the various trusts within these states, of which $0.4 million were in merchandise trust accounts and $0.1 million were in
perpetual care trust accounts. To date, we have not been required to make such deposits; however one state has restricted us from withdrawing otherwise
distributable earnings from the perpetual care trust until the accounts recover from losses.
Any reductions in the earnings of the investments held in merchandise and perpetual care trusts could adversely affect our revenues and cash flow.
We invest our trust assets primarily for generation of realized income. We rely on the earnings, interest and dividends paid by the assets in our trusts to provide
both revenue and cash flow. Interest income from fixed-income securities is particularly susceptible to changes in interest rates and declines in credit worthiness
while dividends from equity securities are susceptible to the issuer’s ability to make such payments. Declines in earnings from perpetual care trust funds would
cause a decline in current revenue, while declines in earnings from other trust funds could cause a decline in future cash flows and revenue.
COMPETITIVE AND MARKET RISKS IN THE DEATHCARE INDUSTRY
The cemetery and funeral home industry continues to be competitive, and if we are not able to respond effectively to changing consumer preferences, our market
share, revenues and profitability could decrease.
Our ability to compete successfully depends on our management’s forward vision, timely responses to changes in the business environment and the ability of our
cemeteries and funeral homes to maintain a good reputation and high professional standards as well as offer products and services at competitive prices. If we
are unable to compete successfully, our financial condition, results of operations and cash flows could be materially adversely affected.
We experience price competition from independent funeral service location and cemetery operators, monument dealers, casket retailers, low-cost funeral
providers and other nontraditional providers of merchandise and services. New market entrants tend to attempt to build market share by offering lower cost
alternatives. In the past, this price competition has resulted in our losing market share in some markets. In other markets, we have had to reduce prices or offer
discounts, thereby reducing profit margins in order to retain or recapture market share. Independent competitors tend to be aggressive in distinguishing
themselves by their independent ownership, and they promote their independence through television, radio and print advertising, direct mailings and personal
contact. Increasing pressures from new market entrants and continued advertising and marketing by competitors in local markets could cause us to lose market
share and revenue. In addition, competitors may change the types or mix of products or services offered. These changes may attract customers, causing us to
lose market share and revenue as well as to incur costs in response to this competition. Increased use of the internet by customers to research and/or purchase
products and services could also have an adverse impact upon our sales and financial results.
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Future market share, revenues and profits will depend in part on our ability to anticipate, identify and respond to changing consumer preferences ahead of and/or
better than our competitors. In addition, any strategies we may implement to address these trends may prove incorrect or ineffective.
If the trend toward cremation in the U.S. continues, our revenues may decline, which could have an adverse effect on our business and financial condition.
We and other deathcare companies that focus on traditional methods of interment face competition from the increasing number of cremations in the U.S.
Industry statistics compiled by the Cremation Association of North America indicate that the percentage of cremations has steadily increased. In 2020, the U.S.
cremation rate was 56.1%, with an annual growth rate per year over 2015 to 2020 of 1.5%. The cremation rate is projected to increase to 65.2% by 2025 and
72.8% by 2030. Because the products and services associated with cremations, such as niches and urns, produce lower revenues than the products and services
associated with traditional interments, a continuing trend toward cremation may reduce our revenues. For the years ended December 31, 2021 and 2020, sales
related to cremations represented approximately 5.8% and 7.1%, respectively, of our consolidated revenues.
Declines in the number of deaths in our markets can cause a decrease in revenues.
Declines in the number of deaths could cause at-need sales of cemetery and funeral home merchandise and services to decline and could cause a decline in the
number of pre-need sales, both of which could decrease revenues. Changes in the number of deaths can vary among local markets and from quarter to quarter,
and variations in the number of deaths in our markets or from quarter to quarter are not predictable. Generally, the number of deaths may fluctuate depending on
weather conditions and illness.
Risks associated with our supply chain could materially adversely affect our financial performance.
We are dependent on our supply chain to supply merchandise to our cemetery and funeral home locations. If our fulfillment network does not operate properly,
if a supplier fails to deliver on its commitments, or if delivery networks have difficulty providing capacity to meet demands for their services, we could
experience merchandise delivery delays or increased delivery costs, which could lead to lost sales and decreased customer confidence and adversely affect our
results of operations. Changes in the costs of procuring commodities used in our merchandise or the costs related to our supply chain, due to inflation or other
matters, could adversely affect our results of operations.
Regulation and compliance could have a material adverse impact on our financial results.
Our operations are subject to regulation, supervision and licensing under numerous federal, state and local laws, ordinances and regulations, including extensive
regulations concerning trusts/escrows, pre-need sales, cemetery ownership, funeral home ownership, marketing practices, crematories, environmental matters
and various other aspects of our business. For example, the funeral industry is regulated at the federal level by the FTC, which requires funeral service locations
to take actions designed to protect consumers. Our facilities are also subject to stringent health, safety, and environmental regulations. Our pay practices,
including wage and hour overtime pay, are also subject to federal and state regulations. Violations of applicable laws could result in fines or sanctions against us.
We may experience significant increases in costs as a result of business regulations and laws, which are beyond our control, including increases in the cost of
health care. Although we seek to control increases in these costs, continued upward pressure on costs could reduce the profitability of our business.
State laws impose licensing requirements and regulate pre-need sales. As such, we are subject to state trust fund and pre-need sales practice audits, which could
result in audit adjustments as a result of non-compliance. In addition, we assume the liability for any audit adjustments for our acquired businesses for periods
under audit prior to our ownership of these acquired businesses. These audit adjustments could have a material adverse impact on our financial condition, results
of operations and cash flow.
In addition, from time to time, governments and agencies propose to amend or add regulations or reinterpret existing regulations, which could increase costs and
decrease cash flows. For example, foreign, federal, state, local, and other regulatory agencies have considered and may enact additional legislation or regulations
that could affect the deathcare industry. These include regulations that require more liberal refund and cancellation policies for pre-need sales of products and
services, limit or eliminate our ability to use surety bonding, require the escheatment of trust funds, increase trust requirements, require the deposit of funds or
collateral to offset unrealized losses of trusts, and/or prohibit the common ownership of funeral service locations and cemeteries in the same market. If adopted
by the regulatory authorities of the jurisdictions in which we operate, these and other possible proposals could have a material adverse effect on our financial
condition, results of operations, and cash flows.
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Compliance with laws, regulations, industry standards, and customs concerning burial procedures and the handling and care of human remains is critical to the
continued success of our business. We continually monitor and review our operations in an effort to ensure that we take the right actions necessary to remaining
in compliance with these laws, regulations and standards. However, litigation and regulatory proceedings regarding these issues could have a material adverse
effect on our financial condition, results of operations and cash flow.
For additional information regarding the regulation of the funeral and cemetery industry, see Part I, Item 1. Business, Regulation of this Annual Report.
RISKS RELATED TO OUR COMMON STOCK
Axar holds a majority of the voting power of our common stock.
Axar beneficially owns approximately 74.9% of our outstanding common stock and as a result, has the ability, subject to certain restrictions in a voting
agreement, to elect all of the members of our Board of Directors. In addition, subject to certain restrictions in that voting agreement, it will be able to determine
the outcome of all other matters requiring stockholder approval, including certain mergers and other material transactions, and will be able to cause or prevent a
change in the composition of our Board of Directors or a change in control of our Company that could deprive our stockholders of an opportunity to receive a
premium for their common stock as part of a sale of our Company. So long as Axar continues to own a significant amount of our outstanding shares, even if
such amount is less than 50%, it will continue to be able to strongly influence all matters requiring stockholder approval, regardless of whether or not other
stockholders believe that the transaction is in their own best interests. Axar’s ownership interest also makes us a “controlled company” within the meaning of the
New York Stock Exchange (the “NYSE”) listing standards. Our Corporate Governance Guidelines, consistent with the listing standards applicable to companies
that are not controlled companies, require that a majority of our directors and all of the members of our Compensation, Nominating and Governance Committee
be independent within the meaning of those standards. However, we can amend our Corporate Governance Guidelines in our Board’s discretion, and as a
controlled company, we are not subject to the requirement that a majority of our directors and all of the members of our Compensation, Nominating and
Governance Committee be independent.
We do not expect to pay dividends on our common stock for the foreseeable future.
The 2029 Indenture governing our 2029 Notes prohibits us from paying any dividends with limited exceptions.
GENERAL RISKS
A number of years may elapse before particular tax matters, for which we have established accruals, are audited and finally resolved.
We are subject to federal income tax laws and state tax laws. The number of tax years open to audit varies depending on the tax jurisdiction. The federal statutes
of limitations have expired for all tax years prior to 2016, and we are not currently under audit by the Internal Revenue Service (“IRS”). Various state
jurisdictions are conducting sales tax audits from years 2015 to 2019 and escheat audits from year 2005 to present day. While it is often difficult to predict the
final outcome or the timing of resolution of any particular tax matter, we believe that our accruals reflect the probable outcome of known tax contingencies.
However, unfavorable settlement of any particular issue may reduce a deferred tax asset or require the use of cash, which may have a material adverse impact to
our financial statements. Favorable resolution could result in reduced income tax expense reported in the financial statements in the future. For further details,
see Part II, Item 8. Financial Statements and Supplementary Data, Note 12 Income Taxes of this Annual Report.
Changes in taxation as well as the inherent difficulty in quantifying potential tax effects of business decisions could have a material adverse effect on the results
of our operations, financial condition, or cash flows.
We make judgments regarding the utilization of existing income tax credits and the potential tax effects of various financial transactions and results of
operations to estimate our obligations to taxing authorities. Tax obligations include income, franchise, real estate, sales and use and employment-related taxes.
These judgments include reserves for potential adverse outcomes regarding tax positions that have been taken. Changes in federal, state, or local tax laws,
adverse tax audit results, or adverse tax rulings on positions taken could have a material adverse effect on the results of our operations, financial condition or
cash flow.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
CEMETERIES AND FUNERAL HOMES
The following table summarizes the distribution of our cemetery and funeral home properties by state as of December 31, 2021 as well as the average estimated
remaining sales life in years for our cemeteries based upon the number of interment spaces sold during the most recent three years:
Cemeteries
Funeral
Homes
Cemetery
Net Acres
Average
Estimated
Net Sales Life
in Years
Number
of Interment
Spaces Sold
in 2021
Alabama
9
6
305
182
1,003
Colorado
2
—
12
647
25
Delaware
1
—
12
382
9
Florida
9
25
278
102
975
Georgia
7
—
135
136
496
Illinois
11
2
438
126
1,055
Indiana
11
4
1,013
281
1,027
Iowa
1
—
89
966
41
Kansas
3
2
84
211
178
Kentucky
2
—
59
140
104
Maryland
10
1
716
194
1,110
Michigan
13
—
818
478
651
Mississippi
2
1
44
317
48
Missouri
3
3
146
142
297
New Jersey
6
—
341
80
994
North Carolina
19
2
619
212
1,447
Ohio
12
2
558
361
942
Oregon
—
—
—
—
72
Pennsylvania
68
8
5,319
389
5,541
Puerto Rico
7
4
209
73
721
Rhode Island
2
—
70
221
27
South Carolina
8
1
395
329
420
Tennessee
11
4
657
173
1,344
Virginia
34
2
1,183
292
1,786
Washington
—
—
—
—
6
West Virginia
33
2
1,404
651
875
Wisconsin
16
—
533
342
545
Total
300
69
15,437
282
21,739
We calculated estimated remaining sales life for each of our cemeteries by dividing the number of unsold interment spaces as of December 31, 2021 by the
average number of interment spaces sold at that cemetery in the three most recent fiscal years. For purposes of estimating remaining sales life, we defined
unsold interment spaces as unsold burial lots and unsold spaces in existing mausoleum crypts as of December 31, 2021. We defined interment spaces sold in the
three most recent fiscal years as:
•
the number of burial lots sold, net of cancellations, over such period;
•
the number of spaces sold over such period in existing mausoleum crypts, net of cancellations; and
•
the number of spaces sold over such period in mausoleum crypts that we have not yet built, net of cancellations.
We count the sale of a double-depth burial lot as the sale of two interment spaces since a double-depth burial lot includes two interment rights. For the same
reason we count an unsold double-depth burial lot as two unsold interment spaces. Because our sales of cremation niches were immaterial, we did not include
cremation niches in the calculation of estimated remaining sales life. When calculating estimated remaining sales life, we did not take into account any future
cemetery expansion. In addition,
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sales of an unusually high or low number of interment spaces in a particular year affect our calculation of estimated remaining sales life. Future sales may differ
from previous years’ sales, and actual remaining sales life may differ from our estimates. We calculated the average estimated remaining sales life by
aggregating unsold interment spaces and interment spaces sold on a state-by-state or company-wide basis. Based on the average number of interment spaces
sold in the last three fiscal years, we estimate that our cemeteries have an aggregate average remaining sales life of 282 years.
The following table shows the cemetery properties that we owned or operated as of December 31, 2021, grouped by estimated remaining sales life:
0 - 25
years
26 - 49
years
50 - 100
years
101 - 150
years
151 - 200
years
Over 200
years
Alabama
—
1
—
4
2
2
Colorado
—
—
—
—
2
—
Delaware
—
—
—
—
—
1
Florida
—
—
2
4
—
3
Georgia
1
1
3
—
—
2
Illinois
1
1
1
—
3
5
Indiana
—
1
2
1
1
6
Iowa
—
—
1
—
—
—
Kansas
—
—
—
1
—
2
Kentucky
—
—
—
—
1
1
Maryland
—
2
1
2
1
4
Michigan
1
—
2
3
—
7
Mississippi
2
—
—
—
—
—
Missouri
—
—
—
—
—
3
New Jersey
—
1
—
1
—
4
North Carolina
1
2
1
2
—
13
Ohio
2
—
3
2
—
5
Pennsylvania
12
3
4
4
1
44
Puerto Rico
3
1
—
—
1
2
Rhode Island
—
1
—
—
1
—
South Carolina
—
1
2
2
—
3
Tennessee
—
1
4
—
—
6
Virginia
2
—
1
5
—
26
West Virginia
6
—
2
2
3
20
Wisconsin
1
—
—
1
1
13
Total
32
16
29
34
17
172
We believe that we have either satisfactory title to or valid rights to use all of our cemetery properties. The 29 cemetery properties that we manage or operate
under long-term lease, operating or management agreements have nonprofit owners. We believe that these cemeteries have either satisfactory title to or valid
rights to use these cemetery properties and that we have valid rights to use these properties under the long-term agreements. Although title to the cemetery
properties is subject to encumbrances, such as liens for taxes, encumbrances securing payment obligations, easements, restrictions and immaterial
encumbrances, we do not believe that any of these burdens should materially detract from the value of these properties or from our interest in these properties
nor should these burdens materially interfere with the use of our cemetery properties in the operation of our business as described above. Many of our cemetery
properties are located in zoned regions, and we believe that cemetery use is permitted for those cemeteries: (i) as expressly permitted under applicable zoning
ordinances; (ii) through a special exception to applicable zoning designations; or (iii) as an existing non-conforming use.
OTHER
In November 2020, we terminated the lease of our 57,000 square foot corporate office in Trevose, PA. Simultaneously, we executed a new lease of
approximately 16,000 square feet for a new corporate office in Bensalem PA, with a new landlord for an eight year term commencing April 1, 2021. In the
interim, the new landlord provided a temporary office space at the same location of approximately 5,500 square feet to use during the buildout of the new office
space.
We are also tenants under various leases covering office spaces other than our corporate headquarters.
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ITEM 3. LEGAL PROCEEDINGS
For information regarding our significant pending administrative and judicial proceedings involving regulatory, operating, transactional, environmental, and
other matters, see Part II, Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 14 Commitments and
Contingencies.
We and certain of our subsidiaries are parties to legal proceedings that have arisen in the ordinary course of business. We do not expect such matters to have a
material adverse effect on our consolidated financial position, results of operations or cash flows. We carry insurance with coverage and coverage limits that we
believe to be customary in the cemetery and funeral home industry. Although there can be no assurance that such insurance will be sufficient to protect us
against such contingencies, we believe that our insurance protection is reasonable in view of the nature and scope of our operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
MARKET INFORMATION
Our common stock is listed on the NYSE under the symbol “STON”.
HOLDERS
As of March 23, 2022, there were approximately 10,990 holders of record of our common stock.
EQUITY COMPENSATION PLAN
For equity compensation plan information, see Part III, Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters of this Annual Report.
PERFORMANCE GRAPH
As a smaller reporting company, we have elected not to provide the performance graph otherwise required by this Item.
ISSUER PURCHASES OF EQUITY SECURITIES
Period
(a)
Total Number of
Shares Purchased
(b)
Average Price Paid
per Share
(c)
Total Number of Shares
Purchased as Part of Publicly
Announced Plans or
Programs
(d)
Maximum Number (or Approximate
Dollar Value) of Shares that May Yet
Be Purchased Under the Plans or
Programs
December 3, 2021
34,700 $
2.49
— $
—
Total
34,700 $
2.49
— $
—
(1)
Represents shares withheld upon the vesting of awards under the StoneMor 2019 Amended and Restated Long-Term Incentive Plan to satisfy certain tax obligations of
the recipients of such awards arising from the vesting thereof and thus may be deemed to have been repurchased by the Company.
(2)
The value of the shares withheld was the closing price of the Company’s common stock on the last trading day before the date on which such shares were withheld.
ITEM 6. [RESERVED]
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s discussion and analysis presented below provides information to assist in understanding the Company’s financial condition and results of
operations and should be read in conjunction with the Company’s consolidated financial statements included in Part II, Item 8. Financial Statements and
Supplementary Data of this Annual Report.
Certain statements contained in this Annual Report, including, but not limited to, information regarding our operating activities, the plans and objectives of our
management and assumptions regarding our future performance and plans are forward-looking statements. When used in this Annual Report, the words
“believes,” “anticipates,” “expects” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are based on
management’s expectations and estimates. These statements are neither promises nor guarantees and are made subject to certain risks and uncertainties that
could cause actual results to differ materially from the results stated or implied in this Annual Report. We believe the assumptions underlying the consolidated
financial statements are reasonable.
Our risks and uncertainties are more particularly described in Part I, Item 1A. Risk Factors of this Annual Report. You should not place undue reliance on
forward-looking statements included in this Annual Report, which speak only as of the date the statements were made. Except as required by applicable laws,
we undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.
BUSINESS OVERVIEW
We are one of the leading providers of funeral and cemetery products and services in the death care industry in the United States (“U.S.”). As of December 31,
2021, we operated 300 cemeteries in 24 states and Puerto Rico, of which 271 were owned and 29 were operated under leases, operating agreements or
management agreements. We also owned, operated or managed 69 funeral homes in 15 states and Puerto Rico.
Our revenue is derived from our Cemetery Operations and Funeral Home Operations segments. Our Cemetery Operations segment principally generates revenue
from sales of interment rights, cemetery merchandise, which includes markers, bases, vaults, caskets and cremation niches and our cemetery services, which
include opening and closing (“O&C”) services, cremation services and fees for the installation of cemetery merchandise. Our Funeral Home Operations segment
principally generates revenue from sales of funeral home merchandise, which includes caskets and other funeral related items and service revenues, which
include services such as family consultation, the removal of and preparation of remains and the use of funeral home facilities for visitation and prayer services.
These sales occur both at the time of death, which we refer to as at-need, and prior to the time of death, which we refer to as pre-need. Our Funeral Home
Operations segment also include revenues related to the sale of term and whole life insurance on an agency basis, in which we earn a commission from the sales
of these insurance policies.
The pre-need sales enhance our financial position by providing a backlog of future revenue from both trust and insurance-funded pre-need funeral and cemetery
sales. We believe pre-need sales add to the stability and predictability of our revenues and cash flows. Pre-need sales are typically sold on an installment plan.
While revenue on the majority of pre-need funeral sales is deferred until the time of need, sales of pre-need cemetery property interment rights provide
opportunities for full current revenue recognition when the property is available for use by the customer.
We also earn investment income on certain payments received from customers on pre-need contracts, which are required by law to be deposited into the
merchandise and service trusts. Amounts are withdrawn from the merchandise and service trusts when we fulfill the performance obligations. Earnings on these
trust funds, which are specifically identifiable for each performance obligation, are also included in the total transaction price. For sales of interment rights, a
portion of the cash proceeds received are required to be deposited into a perpetual care trust. While the principal balance of the perpetual care trust must remain
in the trust in perpetuity, we recognize investment income on such assets as revenue, excluding realized gains and losses from the sale of trust assets. Pre-need
contracts are subject to financing arrangements on an installment basis, with a contractual term not to exceed 60 months. Interest income is recognized utilizing
the effective interest method. For those contracts that do not bear a market rate of interest, we impute such interest based upon the prime rate at the time of
origination plus 150 basis points in order to segregate the principal and interest components of the total contract value.
Our revenue depends upon the demand for funeral and cemetery services and merchandise, which can be influenced by a variety of factors, some of which are
beyond our control including demographic trends, such as population growth, average age, death rates and number of deaths. Our operating results and cash
flows could also be influenced by our ability to remain relevant to the
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customers. We provide a variety of unique product and service offerings to meet the needs of our customers’ families. The mix of services could influence
operating results, as it influences the average revenue per contract. Expense management, which includes controlling salaries, merchandise costs, corporate
overhead and other expense categories, could also impact operating results and cash flows. Lastly, economic conditions, legislative and regulatory changes and
tax law changes, all of which are beyond our control, could impact our operating results and cash flows.
For further discussion of our key operating metrics, see our Results of Operations and Liquidity and Capital Resources sections below.
RECENT EVENTS
The following are key events and transactions that have occurred since January 1, 2021 that were material to us and/or facilitate an understanding of our
consolidated financial statements contained in Part II, Item 8. Financial Statements and Supplementary Data of this Annual Report:
•
COVID-19 Pandemic. See the following section “General Trends and Outlook” of Part II, Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations for discussion on the impact we have seen on our business as a result of the COVID-19 Pandemic.
•
Axar Letter. On September 27, 2021, we announced that we had received the Letter dated September 22, 2021 from Axar in which Axar expressed an
interest in pursuing discussions concerning strategic alternatives that may be beneficial to us and our various stakeholders. Axar has engaged Schulte
Roth & Zabel LLP as its legal advisor and stated in the Letter that it would engage a financial advisor at the appropriate time. According to the Letter,
Axar expected that any such discussions would be conducted with a special committee of the Board, assisted by financial and legal advisors engaged
by such committee. The Letter also stated that any transaction involving Axar arising from such discussions would be conditioned upon, among other
things, approval of the special committee and the Board, the negotiation and execution of mutually satisfactory definitive agreements and customary
terms. The Letter also stated that any transaction structured as a take-private transaction would be subject to a closing condition that the approval of
holders of a majority of the outstanding shares not owned by Axar or its affiliates be obtained. On September 26, 2021, the Board authorized its
Conflicts Committee, which is comprised of independent directors Stephen J. Negrotti, Kevin Patrick and Patricia Wellenbach, to engage in the
discussions contemplated by the Letter, including the authority to engage in discussions concerning and to negotiate the terms and provisions of any
strategic alternative the Conflicts Committee determines to be appropriate in connection with such discussions. Under its charter, the Conflicts
Committee has the authority to reject, approve or recommend that the Board approve any transaction that is a related party transaction, which would
include any transaction to which Axar is a party. The Conflicts Committee has retained independent legal and financial advisors to assist in such
discussions. Following receipt of the Letter and until recently, the Conflicts Committee and its counsel had engaged in discussions with Axar and
Axar’s counsel, which evolved to focus on a potential offer by Axar to acquire the shares of the Company that are not owned by Axar or its affiliates.
While these negotiations had been productive, the Conflicts Committee and Axar had not come to agreement on any price that Axar would pay for
such shares or on certain other terms of any transaction, and there can be no assurance that any agreement would be reached in the future.
Negotiations between the Conflicts Committee and Axar were recently tabled in light of the work undertaken by the Conflicts Committee with respect
to the independent review of certain investments by our trusts in which Axar had an interest. See Part III, Item 13. Certain Relationships and Related
Transactions, and Director Independence.
The Conflicts Committee may at any time determine to resume such negotiations, but there can be no assurance that even if such negotiations are
resumed, any agreement with respect to a take-private transaction will be executed or that this or any other transaction will be approved or
consummated. The Company does not undertake any obligation to provide any updates with respect to these matters except as required under
applicable law.
•
Refinancing. On May 11, 2021, we issued $400.0 million aggregate principal amount of 8.500% Senior Secured Notes due 2029 (the “2029 Notes”).
The gross proceeds from the sale of the 2029 Notes was $389.9 million, less advisor fees, legal fees, mortgage costs and other closing expenses. The
2029 Notes were issued pursuant to the 2029 Indenture, dated as of May 11, 2021, by and among the Company, the guarantors named therein and
Wilmington Trust, National Association, as trustee and collateral agent. Substantially concurrently with the closing of the offering of the 2029 Notes,
the 2024 Issuers deposited from the net cash proceeds from the offering of the 2029 Notes an amount sufficient to fund the full redemption of the
outstanding 2024 Notes with the 2024 Trustee as trustee under the 2024 Indenture, among the 2024 Issuers, the guarantors party thereto and the 2024
Trustee governing the 2024 Notes. Upon deposit of such funds with the 2024 Trustee, the 2024 Indenture was satisfied and discharged in accordance
with its terms. As a result of the
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satisfaction and discharge of the 2024 Indenture, the 2024 Issuers and the 2024 Guarantors, including the Company, have been released from their
obligations with respect to the 2024 Indenture and the 2024 Notes, except with respect to those provisions of the 2024 Indenture that, by their terms,
survive the satisfaction and discharge of the 2024 Indenture.
•
Moon. In April 2020, we had outsourced all of the grounds and maintenance services at most of the funeral homes and cemeteries we own or manage
to Moon Landscaping, Inc. and its affiliate, Rickert Landscaping, Inc. (collectively “Moon”). We also had the right under the MSAs to take back the
responsibility for grounds and maintenance services at the locations outsourced to Moon. Due to certain liquidity constraints and performance issues
experienced by Moon, we exercised this right with respect to 81 locations effective July 1, 2021, 22 locations effective August 1, 2021, 111 locations
effective August 9, 2021, 34 locations effective November 15, 2021 and the remaining locations effective January 7, 2022.
In connection with these changes, we are now using our own equipment to service these locations and rehired the employees Moon had previously
hired from us upon execution of the MSAs. These employees are providing certain burial and grounds services for us at these locations using the
equipment previously leased to Moon. We are outsourcing substantially all of the landscaping and other maintenance services previously provided by
Moon to other vendors who had previously been subcontractors to Moon. We do not anticipate that these changes will have any material impact on
the cost of providing the services compared to the amounts that we would have paid to Moon under the MSAs.
On August 12, 2021, Moon and certain of its affiliates filed a petition under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”)
in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). On October 7, 2021, Moon and the Company entered
into a summary of terms (the “Term Sheet”) pursuant to which (a) Moon would file a motion with the Bankruptcy Court to assume the MSAs, (b) the
aggregate amounts due to the Company from Moon under the MSAs for periods prior to the initial bankruptcy filing (the “Pre-Petition Cure
Amount”) was at least $5.1 million, (c) the aggregate amount due to the Company from Moon under the MSAs for periods after such filing were at
least $572,605 (the “Post-Petition Cure Amount”), (d) payment of the Pre-Petition Cure Amount would be deferred until a later date, but not later than
the effective date of any approved reorganization plan, (e) the Company was permitted to set off $42,500 from each bi-weekly payment to Moon
under the MSAs as payment against the Post-Petition Cure Amount, with any unpaid balance being paid when the Pre-Petition Cure Amount was
paid, (f) upon Bankruptcy Court approval of Moon’s motion to assume the MSAs, the Company would exercise its right to modify the MSAs by
taking back responsibility for ground and maintenance services at an additional 53 locations but would otherwise agree not to further exercise such
right for a period of 60 days after such approval absent certain breaches by Moon. On October 14, 2021, Moon filed a motion with the Bankruptcy
Court seeking approval to assume the MSAs subject to the terms and conditions of the Term Sheet. After a hearing before the Bankruptcy Court on
November 4, 2021, the Bankruptcy Court granted Moon’s motion to assume the MSAs, which would normally include an obligation to repay in full
both the Pre-Petition Cure Amount and the Post-Petition Cure Amount as a priority claim in the bankruptcy case. However, in its order, the
Bankruptcy Court reserved decision on whether the Pre-Petition Cure Amount would be entitled to such priority treatment notwithstanding the
assumption of the MSAs, and all interested parties, including the Company, reserved their respective rights with respect to that decision.
Management believes the impact on the Company of Moon’s bankruptcy filing has been partially mitigated because, over a period of time, we have
taken back the responsibilities under the MSAs for all of the locations managed by Moon. However, in the interim, we have continued to experience
performance issues and other disruptions in operations at those locations. In addition, from time to time, on the behalf of Moon, we have incurred a
higher level of expenses relating to services covered by the MSAs, including location materials and supplies, uniforms, repair of marker damage,
customer refunds and payments to third party landscapers and repair shops. These additional payments, which were in addition to the payments
specified in the MSAs, were recorded as cemetery operating expenses in the relevant periods and as of December 31, 2021 aggregated $6.0 million.
While we have the ability to seek reimbursement from Moon for these additional payments as outlined in the MSAs, we do not expect to recover any
material portion of these amounts.
On February 9, 2022, the Bankruptcy Court converted all of the Debtors’ cases (except the case for Moon Nurseries Inc. (“Moon Nurseries”)) to cases
proceeding under Chapter 7 of the Bankruptcy Code, and such conversions occurred on February 11, 2022. The Bankruptcy Court found Moon
Nurseries to be a “farmer,” as that term is defined within the Bankruptcy Code, and thus it could not convert that case without the Debtor’s consent.
On March 9, 2022, the trustee in the Moon Nurseries case filed a motion to convert that case to a case proceeding under Chapter 7. The Bankruptcy
Court granted the trustee’s motion on March 22, 2022 and entered an order on March 31, 2022 converting the Moon Nurseries case to a case
proceeding under Chapter 7. In light of the conversion of these cases, we do not believe it is likely that we will be able to obtain reimbursement of the
Pre-Petition Cure Amount or the Post-Petition Cure Amount in full.
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•
Divestitures and Acquisitions. On May 24, 2021, we completed the Missouri Sale for a total cash purchase price of $720,000, resulting in a loss on
sale of $1.8 million for the year ended December 31, 2021.
On April 2, 2021, we completed the Clearstone Sale for a net cash purchase price of $6.2 million, subject to certain adjustments. We redeemed an
additional $6.7 million of principal amount of the 2024 Notes in accordance with the terms of the 2024 Indenture. The Clearstone Agreement to sell
the Clearstone Assets, together with the other divestitures completed in 2020, represented a strategic exit from the West Coast. Therefore, the results
of operations of the Clearstone Assets, and of the businesses sold in 2020 for the period before their respective sales, have been presented as
discontinued operations on the accompanying consolidated statements of operations for the years ended December 31, 2021 and 2020. Additionally,
all of the assets and liabilities associated with the Clearstone Assets have been classified as held for sale on the accompanying consolidated balance
sheet at December 31, 2020.
On January 31, 2022, we acquired two cemeteries in Virginia for cash consideration of $5.1 million, pursuant to a definitive agreement signed on
March 23, 2021 with Daly Seven, Inc. to acquire four cemeteries for a total purchase price of $5.4 million, subject to customary working capital
adjustments. The remaining two cemeteries, which are located in North Carolina, are expected to close in the second quarter of 2022.
On March 1, 2022, the Company acquired one funeral home in Florida for a cash purchase price of $1.7 million and on March 15, 2022, the Company
acquired one combination cemetery and funeral home, a separate cemetery and a separate funeral home in West Virginia for a cash purchase price of
$11.3 million, in each case subject to customary working capital adjustments.
GENERAL TRENDS AND OUTLOOK
We expect our business to be affected by key trends in the deathcare industry, based upon assumptions made by us and information currently available.
Deathcare industry factors affecting our financial position and results of operations include, but are not limited to, death rates, the ongoing COVID-19
Pandemic, per capita disposable income, demographic trends in terms of number of adults aged 65 and older, cremation rates and trends and e-commerce sales.
The number of deaths which is related to the age structure of the population, mortality rates, disease prevalence, natural disasters, sudden accidents, suicides and
other causes drives industry revenue. With the aging of the U.S. population, the number of deaths is expected to increase over the next several years.
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Cremations typically cost significantly less than traditional burial services and bring in significantly less revenue and profit for cemeteries and funeral homes.
The rising demand for cremations due to cost considerations, increased mobility of the population, environmental reasons, religious considerations and changing
consumer preferences present a potential threat to the cemetery services and funeral homes industries. According to the National Funeral Directors Association’s
2021 Cremation & Burial Report, in 2021, the projected burial rate is 36.6%, down from 37.5% in 2020, and the projected cremation rate is 57.5%, up from
56.0% in 2020.
Funeral homes have traditionally benefited from limited competition for industry products, such as caskets and urns; however, online retailers are beginning to
encroach on this market sector by offering these products to consumers at more cost-effective prices.
In addition, we are subject to fluctuations in the fair value of equity and fixed-maturity debt securities held in our trusts. These values can be negatively
impacted by contractions in the credit market and overall downturns in economic activity. Our ability to make payments on our debt depends on our success at
managing operations with respect to these industry trends. To the extent our underlying assumptions about or interpretations of available information prove to be
incorrect, our actual results may vary materially from our expected results.
COVID-19 Pandemic
The COVID-19 Pandemic poses a significant threat to the health and economic wellbeing of our employees, customers and vendors. Our operations are deemed
essential by the state and local governments in which we operate, with the exception of Puerto Rico, and we have been working with federal, state and local
government officials to ensure that we continue to satisfy their requirements for offering our essential services.
Our top priority is the health and safety of our employees and the families we serve. Since the start of the outbreak in the U.S., our Company’s senior
management team has taken actions to protect our employees and the families served, and to support our field locations as they adapt and adjust to the
circumstances resulting from the COVID-19 Pandemic. The operation of all of our
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facilities is critically dependent on the employees who staff these locations. To ensure the wellbeing of our employees and their families, we provided all of our
employees with detailed health and safety literature on COVID-19, such as the CDC’s industry-specific guidelines for working with the deceased who were or
may have been infected with COVID-19. In addition, our procurement and safety teams have consistently secured and distributed supplies to ensure that our
locations have appropriate personal protective equipment (“PPE”) and cleaning supplies to provide our essential services, as well as updated and developed new
safety-oriented guidelines to support daily field operations. These guidelines include reducing the number of staff present for a service and restricting the size
and number of attendees. We also implemented additional safety and precautionary measures as it concerns our businesses’ day-to-day interaction with the
families and communities we serve. Our corporate office employees began working from home in March 2020 consistent with CDC guidance to reduce the risks
of exposure to COVID-19 while still supporting our field operations. We did not experience any significant disruptions to our business as a result of the work
from home policies in our corporate office and employees have returned on a hybrid basis. We monitor the CDC guidance on a regular basis, continually review
and update our processes and procedures and provide updates to our employees as needed to comply with regulatory guidelines.
Our marketing and sales team quickly responded to the sales challenges presented by the COVID-19 Pandemic by implementing virtual meeting options using a
variety of web-based tools to ensure that we can continue to connect with and meet our customers’ needs in a safe, effective and productive manner. Some of our
locations provide live video streaming of their funeral and burial services to our customers or providing other alternatives that respect social distancing, so that
family and friends can connect during their time of grief.
Like most businesses world-wide, the COVID-19 Pandemic has impacted us financially. At the start of the COVID-19 Pandemic in early 2020, we saw our pre-
need sales and at-need sales activity decline as Americans practiced social distancing and crowd size restrictions were put in place. However, since May 2020,
we have experienced at-need sales growth, and since late 2020, we have experienced pre-need sales growth. We believe the implementation of our virtual
meeting tools early on in the COVID-19 Pandemic was one of several key steps to mitigate this disruption. Throughout the COVID-19 Pandemic, our
cemeteries and funeral homes have largely remained open and available to serve our families in all the locations in which we operate to the extent permitted by
local authorities, and we expect that this will continue. We have leveraged the relationships we have made with the families we have served during our response
to the COVID-19 Pandemic, which has directly resulted in new sales leads and the increase in pre-need sales activity. In addition, as community restrictions
have eased and the COVID-19 vaccine became widely available, we have experienced growth in our pre-need cemetery sales, see “Results of Operations”
section below.
We expect the COVID-19 Pandemic could have an adverse effect on our future results of operations and cash flows depending on COVID-19 variants and case
counts. However we cannot presently predict, with certainty, the scope and severity of that impact. In the event there are confirmed diagnoses of COVID-19
within a significant number of our facilities, we may incur additional costs related to the closing and subsequent cleaning of these facilities and the ability to
adequately staff the impacted sites. In addition, our pre-need customers with installment contracts could default on their installment contracts due to lost work or
other financial stresses arising from the COVID-19 Pandemic. Alternatively, in the event that COVID-19 case counts continue to normalize and variants become
less severe, we would expect to see a reduction in the demand for at-need products and services as well as a reduction in pre-need turning to at-need.
Business Strategies
Our management identified key areas of strategic improvement as part of its turnaround strategy in 2018, which has allowed us to realize upside in our
operational and financial performance. We believe that the implementation of these key strategic initiatives allowed us to succeed during the tumultuous
environment associated with the COVID-19 Pandemic. The key pillars of the turnaround strategy included:
•
Strategic Evaluation of Asset Base. We performed a full asset review to align resources on targeted facilities while divesting select non-core assets.
•
Decentralized Operating Structure. We restructured our operating model with divisional presidents and general managers to increase responsibility
of property-level employees and help execute on operational and financial strategies.
•
Sales Productivity and Profitable Sales Growth. We established key performance indicators, implemented client relationship management analytics,
realigned incentives and created new onboarding program to improve the productivity of our sales force.
•
Significant Expense Reductions. We optimized our expense structure by integrating new expense systems, downsizing headcount and identifying
other inefficient uses of resources.
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•
Financial Reporting Efficiencies. We upgraded our internal accounting and financial practices and senior accounting personnel to generate
increased transparency and financial integrity.
We are poised to execute on a targeted, long-term growth strategy to reduce leverage and increase the sustainability of our operations. We have identified the
following pathway to additional growth:
•
Continued Execution of Organic Growth
o
Continue to recognize the benefits of expanding margins created through the realization of our turnaround strategy and sustainable
operational performance;
o
Focus on sales growth and EBITDA at each property location, driving both at-need and pre-need sales for additional cash flow today and
into the future;
o
Explore new product offerings to cater to evolving customer demands including cremation products; and
o
Deploy capital expenditure projects to capitalize on new sales, performance or efficiency opportunities.
•
Inorganic Growth and Acquisition Opportunities
o
Target core markets for accretive, strategic growth that complements our existing portfolio, while leveraging our scale and management
capabilities; and
o
Focus on existing synergies to add value to new acquisitions, including trust management capabilities and a robust pre-need sales program.
•
Naturally De-Lever and Grow Our Platform
o
Use excess cash flow to acquire new properties to create additional EBITDA;
o
Grow at a sustainable pace and integrate assets to take advantage of our existing platform and management expertise; and
o
Continue to build upon our strong backlog of assets and trust appreciation through existing operations, organic growth opportunities and
future acquisitions.
RESULTS OF OPERATIONS
We have two distinct reportable segments, Cemetery Operations and Funeral Home Operations, which are supported by corporate costs and expenses.
Cemetery Operations
Overview
We are currently one of the largest owners and operators of cemeteries in the United States of America. As of December 31, 2021, we operated 300 cemeteries in
24 states and Puerto Rico. We own 271 of these cemeteries, and we manage or operate the remaining 29 under leases, operating agreements or management
agreements. Revenues from our Cemetery Operations segment accounted for approximately 86% and 85% of our consolidated revenues during the years ended
December 31, 2021 and 2020, respectively.
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Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
The following table presents operating results for our Cemetery Operations segment for the years ended December 31, 2021 and 2020 (in thousands):
Year Ended December 31,
Variance
2021
2020
$
%
Interments
$
85,734 $
67,853 $
17,881
26 %
Merchandise
68,095
60,600
7,495
12 %
Services
70,314
65,701
4,613
7 %
Interest income
8,455
7,763
692
9 %
Investment and other
46,352
35,969
10,383
29 %
Total revenues
278,950
237,886
41,064
17 %
Cost of goods sold
51,746
40,119
11,627
29 %
Cemetery expense
76,464
68,654
7,810
11 %
Selling expense
58,962
49,668
9,294
19 %
General and administrative expense
42,018
37,970
4,048
11 %
Depreciation and amortization
5,997
6,474
(477 )
(7 %)
Total costs and expenses
235,187
202,885
32,302
16 %
Segment operating profit
$
43,763 $
35,001 $
8,762
25 %
Cemetery interments revenues were $85.7 million for the year ended December 31, 2021, an increase of $17.9 million and 26% from $67.9 million for the year
ended December 31, 2020. The increase in cemetery interments revenues resulted from an increase in pre-need revenues of $15.9 million due to improved
productivity of the salesforce and an increase in at-need revenues of $2.7 million primarily related to increases in death rates associated with the COVID-19
Pandemic and the aging Baby Boomer generation, offset by an increase in cancellations and promotional discounts of $0.7 million.
Cemetery merchandise revenues were $68.1 million for the year ended December 31, 2021, an increase of $7.5 million and 12% from $60.6 million for the year
ended December 31, 2020. The increase in cemetery merchandise revenues resulted from an increase of $5.2 million in at-need revenues and an increase in pre-
need turning at-need revenues of $2.4 million, both of which were positively impacted by increased burial and death rates associated, in part, with the COVID-
19 Pandemic, offset by an increase in cancellations and promotional discounts of $0.1 million.
Cemetery services revenues were $70.3 million for the year ended December 31, 2021, an increase of $4.6 million and 7% from $65.7 million for the year ended
December 31, 2020. The increase in cemetery services revenues resulted from an increase of $2.8 million in at-need revenues and an increase in pre-need
turning at-need revenues of $1.9 million, both of which were positively impacted by the increased burial and death rates associated, in part, with the COVID-19
Pandemic, offset by an increase of $0.1 million associated with cancellations and promotional discounts.
Investment and other income was $46.4 million for the year ended December 31, 2021, an increase of $10.4 million and 29% from $36.0 million for the year
ended December 31, 2020. The increase was driven by increases in investment income associated with the merchandise trust and the perpetual care trust of $4.6
million and $3.2 million, respectively. Additionally, there was an increase of $2.2 million in RIA fees earned and a $0.4 million increase in other revenues.
Cost of goods sold was $51.7 million for the year ended December 31, 2021, an increase of $11.6 million and 29% from $40.1 million for the year ended
December 31, 2020. The increase was primarily the result of increased revenue recognized, the rising costs of vaults and markers associated with supply chain
constraints and a result of casket inventory impairment of $1.8 million. Cost of goods sold, as a percentage of cemetery interments, merchandise and services
revenues, increased to 23.1% for the year ended December 31, 2021 compared to 20.7% for the year ended December 31, 2020.
Cemetery expenses, which include maintenance and landscaping costs as well as certain facility related expenses, were $76.5 million for the year ended
December 31, 2021, an increase of $7.8 million and 11% from $68.7 million for the year ended December 31, 2020. The increase was driven by an increase of
$2.9 million in repairs and maintenance expenditures, representing strategic re-investment into the cemetery properties. The remaining increase of $4.9 million
was primarily related to additional costs associated with the transition of cemetery maintenance back from Moon, including costs related to subcontracted
landscapers and third-party interment companies, rental equipment and marker repairs, all driven by the under-performance of Moon.
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Selling expenses were $59.0 million for the year ended December 31, 2021, an increase of $9.3 million and 19% from $49.7 million for the year ended
December 31, 2020. An increase of $2.4 million was related to strategic targeted advertising spend utilized to drive revenue and sales production growth, and the
remaining increase of $6.9 million was primarily related to increases in cemetery revenues. Selling expenses as a percentage of cemetery interments,
merchandise and services revenues increased to 26.3% for the year ended December 31, 2021, compared to 25.6% for the year ended December 31, 2020.
General and administrative expenses were $42.0 million for the year ended December 31, 2021, an increase of $4.0 million and 11% from $38.0 million for the
year ended December 31, 2020. The increase was primarily the result of a $1.8 million increase in insurance costs, a $1.2 million increase in payroll and related
costs, primarily associated with enhanced bonus programs for general managers and regional administration, a $0.5 million increase in credit card processing
fees associated with increased revenues and a $1.1 million increase in other miscellaneous expenses. Those increases were offset by a $0.6 million decrease in
spend associated with one-time purchases of personal protective equipment in 2020.
Depreciation and amortization expenses were $6.0 million for the year ended December 31, 2021, a decrease of $0.5 million and 7% from $6.5 million for the
year ended December 31, 2020. The change was due to routine depreciation and amortization of the associated asset base.
Funeral Home Operations
Overview
As of December 31, 2021, we owned, operated or managed 69 funeral homes located in 15 states and Puerto Rico. Revenues from Funeral Home Operations
accounted for approximately 14% and 15% of our consolidated revenues during the years ended December 31, 2021 and 2020, respectively.
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
The following table presents operating results for our Funeral Home Operations for the years ended December 31, 2021 and 2020 (in thousands):
Year Ended December 31,
Variance
2021
2020
$
%
Merchandise
$
22,949 $
21,637 $
1,312
6 %
Services
20,943
20,016
927
5 %
Total revenues
43,892
41,653
2,239
5 %
Merchandise
6,285
5,872
413
7 %
Services
19,283
18,078
1,205
7 %
Depreciation and amortization
1,686
1,824
(138 )
(8 %)
Other
12,974
10,839
2,135
20 %
Total expenses
40,228
36,613
3,615
10 %
Segment operating profit
$
3,664 $
5,040 $
(1,376 )
(27 %)
Funeral home merchandise revenues were $22.9 million for the year ended December 31, 2021, an increase of $1.3 million and 6% from $21.6 million for the
year ended December 31, 2020. The increase resulted from a $1.4 million increase in at-need revenues offset by a $0.1 million decrease in pre-need turned at-
need revenue.
Funeral home services revenues were $20.9 million for the year ended December 31, 2021, an increase of $0.9 million and 5% from $20.0 million for the year
ended December 31, 2020. The increase was associated primarily with a $0.5 million increase in income recognized on merchandise trust, a $0.1 million
increase in at-need revenues, a $0.1 million increase in pre-need turned at-need revenues and a $0.2 million increase in other funeral home revenues.
Funeral home total expenses were $40.2 million for the year ended December 31, 2021, an increase of $3.6 million and 10% from $36.6 million for the year
ended December 31, 2020. Funeral home service costs increased $1.2 million or 7%, driven largely by enhanced compensation plans for general managers and
funeral sales teams, along with increased overtime costs and contract removal costs as death rates grew. Additionally, other funeral costs increased $2.1 million,
which included a $0.4 million increase in insurance costs, a $0.3 million increase in repairs and maintenance associated with strategic investment into our
funeral homes and a $1.4 million increase in other facility related expenditures, such as utilities, supplies and landscaping.
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Corporate
Operating Results
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Corporate Overhead
Corporate overhead expense was $39.9 million for the year ended December 31, 2021, an increase of $4.0 million and 11% from $36.0 million for the year
ended December 31, 2020. The change was due to the following:
•
$0.9 million increase in payroll and payroll related costs, largely associated with enhanced compensation programs;
•
$0.7 million increase in corporate insurance costs related primarily to D&O coverage;
•
$0.6 million increase in costs associated with stock-based compensation programs;
•
$0.5 million increase in printing and stationery costs to support sales efforts;
•
$0.4 million increase in professional fees and legal fees, including those costs related to the work performed by the conflicts committee of the Board
of Directors related to strategic plan review;
•
$0.4 million increase in franchise tax expenses;
•
$0.2 million increase in costs associated with acquisition analysis and due diligence; and
•
$0.3 million increase in miscellaneous other expenses.
Loss on Sale of Business and Other Impairments
For the year ended December 31, 2021, we recorded a loss of $2.3 million which consisted of a loss of $1.8 million in connection with the Missouri Sale in May
2021 and an impairment of $0.5 million related to property and equipment held for sale. For the year ended December 31, 2020, there were no such transactions.
Other (Losses) Gains, Net
Other losses, net were $1.0 million for the year ended December 31, 2021, compared to other gains, net of $0.1 million for the year ended December 31, 2020.
Other losses, net for the year ended December 31, 2021 primarily consisted of a $0.5 million impairment related to the termination of a management agreement
and a $0.5 million impairment of vaults.
Interest Expense
Interest expense was $39.0 million for the year ended December 31, 2021, a decrease of $6.6 million and 14% from $45.5 million for the year ended December
31, 2020. The change was due to a decrease of $5.1 million related to a lower interest rate on the 2029 Notes and a decrease of $1.5 million due to lower
amortization of deferred financing fees.
Loss on Debt Extinguishment
For the year ended December 31, 2021, we recorded a loss of $40.1 million related to the full redemption of the 2024 Notes, which was comprised of an early
redemption fee of $18.5 million and the write-off of deferred financing fees and original issue discount of $21.6 million. For the year ended December 31, 2020,
there was no loss on debt extinguishment.
Income Tax Benefit
Income tax benefit was $18.4 million for the year ended December 31, 2021 compared to $4.9 million for the year ended December 31, 2020. The income tax
benefit for the year ended December 31, 2021 was primarily related to tax benefits realized due to the loss from operations and the 2021 debt refinancing
transaction. The income tax benefit for the year ended December 31, 2020 was primarily related to changes in projected federal deferred tax savings related to
filing a consolidated federal return.
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LIQUIDITY AND CAPITAL RESOURCES
General
Our primary sources of liquidity are cash generated from operations, proceeds from asset sales and the remaining proceeds from the sale of the 2029 Notes. In
addition, we anticipate entering into a $40 million senior secured revolving credit facility in the second quarter of 2022 to provide additional liquidity. Our
primary cash requirements, in addition to normal operating expenses, are for capital expenditures, net contributions to the merchandise and perpetual care trust
funds, debt service and acquisitions. Amounts contributed to the merchandise trust funds will be withdrawn at the time of the delivery of the product or service
sold to which the contribution related, which will reduce the amount of additional borrowings or asset sales needed.
While we rely heavily on our available cash and cash flows from operating activities to execute our operational strategy and meet our financial commitments
and other short-term financial needs, we cannot be certain that sufficient capital will be generated through operations or be available to us to the extent required
and on acceptable terms. Based on our forecasted operating performance and the issuance of the 2029 Notes and the redemption of the 2024 Notes, we believe
that we will be able to continue as a going concern for the next twelve-month period.
Cash Flows
The following table summarizes our consolidated statements of cash flows by class of activities (in thousands):
Year Ended December 31,
2021
2020
Net cash provided by operating activities
$
2,626
$
1,360
Net cash (used in) provided by investing activities
(5,016 )
50,983
Net cash provided by (used in) financing activities
42,597
(49,020 )
Significant sources and uses of cash during the Years Ended December 31, 2021 and 2020
Operating Activities
Net cash provided by operating activities was $2.6 million for the year ended December 31, 2021 compared to $1.4 million during the year ended December 31,
2020. The $1.3 million favorable change in operating cash flow was primarily due to an increase of $11.6 million resulting from a reduction in the net loss
excluding non-cash items due to improved operating performance and expense management efforts, offset in part by the change in working capital items which
in the aggregate reduced operating cash flows by $10.4 million.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2021 was $5.0 million compared to net cash provided by investing activities of $51.0
million the for the year ended December 31, 2020. The cash used in investing activities for the year ended December 31, 2021 was attributable to capital
expenditures of $12.0 million, offset in part by proceeds from divestitures of $7.0 million. Net cash provided by investing activities during the year ended
December 31, 2020 consisted of proceeds from the divestitures of discontinued operations of $57.3 million, offset in part by capital expenditures of $6.4 million.
Financing Activities
Net cash provided by financing activities for the year ended December 31, 2021 was $42.6 million, compared to net cash used in financing activities of $49.0
million for the year ended December 31, 2020. The cash provided by financing activities for the year ended December 31, 2021 was primarily due to proceeds
from the issuance of the 2029 Notes offset partially by the full redemption of the 2024 Notes and the related early redemption fee and costs of financing. Net
cash used in financing activities for the year ended December 31, 2020 consisted of the redemption of $60.0 million of the 2024 Notes, using proceeds from the
Oakmont Sale, the Olivet Sale and the Remaining California Sale, financing costs of $4.2 million related to the debt amendment in April 2020 and principal
payments of $1.6 million on our finance leases. This was offset in part by $17.0 million of proceeds from the issuance of equity to Axar.
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Capital Expenditures
The following table summarizes maintenance and expansion capital expenditures for the periods presented (in thousands):
Year Ended December 31,
2021
2020
Maintenance capital expenditures
$
6,961
$
2,268
Expansion capital expenditures
5,034
4,092
Total capital expenditures
$
11,995
$
6,360
Contractual Obligations
In the normal course of business, we enter into various contractual and contingent obligations that impact or could impact our liquidity. We have contractual
obligations requiring future cash payments related to debt maturities, interest on debt, operating lease and finance lease agreements, lease and management
agreements, liabilities to purchase merchandise related to our pre-need sales contracts and capital commitments to private credit funds.
In addition to these contractual obligations, we have potential funding obligations related to our merchandise and service trusts. In certain states, we have
withdrawn allowable distributable earnings including unrealized gains prior to the maturity or cancellation of the related contract. In the event that our trust
investments do not recover from market declines, we may be required to deposit portions or all of these amounts into the respective trusts in some future period.
Additionally, some states have laws that either require replenishment of investment losses under certain circumstances or impose various restrictions when trust
fund values drop below certain prescribed amounts. As of December 31, 2021, we had unrealized losses of $0.5 million in the various trusts within these states.
Long-Term Debt
On May 11, 2021, we issued $400.0 million aggregate principal amount of 8.500% Senior Secured Notes due 2029 and used a substantial portion of the
proceeds to fund the redemption of all of our outstanding 2024 Notes. Interest on the 2029 Notes accrues at a rate of 8.5% per year, payable in cash
semiannually, in arrears, on May 15 and November 15 of each year, beginning on November 15, 2021. As of December 31, 2021, future interest payments on
the 2029 Notes total $250.8 million. For further details on our 2029 Notes, see Note 9 Long-Term Debt of Part II, Item 8. Financial Statements and
Supplementary Data of this Annual Report.
Leases
We leases variety of assets such as office space, funeral homes, warehouses and equipment through both operating and financing leases. As of December 31,
2021, the total amount of future lease payments under operating leases, which had a weighted average remaining lease term of 5.6 years, was $8.0 million, of
which $1.7 million is short-term. As of December 31, 2021, the total amount of future lease payments under finance leases, which had a weighted average
remaining lease term of 1.6 years, was $3.2 million, of which $2.1 million is short-term. For further details on our leases, see Note 15 Leases of Part II, Item 8.
Financial Statements and Supplementary Data of this Annual Report.
Agreements with the Archdiocese of Philadelphia
In accordance with the lease and management agreements with the Archdiocese of Philadelphia, we have agreed to pay to the Archdiocese aggregate fixed rent
of $36.0 million in the following amounts:
Lease Years 6-20 (June 1, 2019-May 31, 2034)
$1,000,000 per Lease Year
Lease Years 21-25 (June 1, 2034-May 31, 2039)
$1,200,000 per Lease Year
Lease Years 26-35 (June 1, 2039-May 31, 2049)
$1,500,000 per Lease Year
Lease Years 36-60 (June 1, 2049-May 31, 2074)
None
The fixed rent for lease years 6 through 11, an aggregate of $6.0 million, is deferred. If prior to May 31, 2025, the Archdiocese terminates the agreements
pursuant to its terms during lease year 11 or we terminate the agreements as a result of a default by the Archdiocese, we are entitled to retain the deferred fixed
rent. If the agreements are not terminated, the deferred fixed rent will become due and payable on or before June 30, 2025.
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Deferred Revenues
Revenues from the sale of services and merchandise as well as any investment income from the merchandise trusts is deferred until such time that the services
are performed or the merchandise is delivered. As a result of our pre-need sales, the backlog of unfulfilled pre-need performance obligations recorded in
deferred revenues was $1,056.3 million at December 31, 2021. This balance represents the revenues to be recognized from the total performance obligations on
our customer contracts.
Unfunded Commitments
At December 31, 2021, we had $179.7 million in unfunded capital commitments to private credit funds that are callable at any time during the lockup periods,
which range from zero to fifteen years with four potential one year extensions at the discretion of the funds’ general partners and which will be funded using
existing trust assets. For further details on our merchandise trusts and perpetual trusts, see Part II, Item 8. Financial Statements and Supplementary Data – Note
6 Merchandise Trusts and Note 7 Perpetual Care Trusts of this Annual Report.
Surety Bonds
We have entered into arrangements with certain surety companies, whereby such companies agree to issue surety bonds on our behalf as financial assurance
and/or as required by existing state and local regulations. The surety bonds are used for various business purposes; however, the majority of the surety bonds
issued and outstanding have been used to support our pre-need sales activities.
When selling pre-need contracts, we may post surety bonds where allowed by state law. We post the surety bonds in lieu of trusting a certain amount of funds
received from the customer. If we were not able to renew or replace any such surety bond, we would be required to fund the trust only for the portion of the
applicable pre-need contracts for which we have received payments from the customers, less any applicable retainage, in accordance with state law. We have
provided cash collateral to secure these surety bond obligations and may be required to provide additional cash collateral in the future under certain
circumstances.
For the years ended December 31, 2021 and 2020, we had $101.4 million and $97.5 million, respectively, of cash receipts from sales attributable to related bond
contracts. These amounts do not consider reductions associated with taxes, obtaining costs or other costs.
Surety bond premiums are paid annually and the bonds are automatically renewable until maturity of the underlying pre-need contracts, unless we are given
prior notice of cancellation. Except for cemetery pre-construction bonds (which are irrevocable), the surety companies generally have the right to cancel the
surety bonds at any time with appropriate notice. In the event a surety company were to cancel the surety bond, we would be required to obtain replacement
surety assurance from another surety company or fund a trust for an amount generally less than the posted bond amount. We do not expect that we will be
required to fund material future amounts related to these surety bonds due to a lack of surety capacity or surety company non-performance.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our consolidated financial statements and related notes included within Part II, Item 8. Financial Statements and Supplementary Data of this
Annual Report in conformity with general accepted accounting principles (“GAAP”) requires us to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue, expenses and disclosure of contingent assets and liabilities that arose during the reporting period and through the date our
financial statements are filed with the SEC. Although we base our estimates on historical experience and various other assumptions we believe to be reasonable,
actual results may differ from these estimates.
A critical accounting estimate or policy is one that requires a high level of subjective judgement by management and could have a material impact on our
financial position, results of operations or cash flows if actual results vary significantly from our estimates.
Revenue Recognition
We recognize revenue in an amount that reflects the consideration to which we expect to be entitled for the transfer of goods and services to our customers. We
account for individual products and services separately as distinct performance obligations. Our performance obligations include the delivery of funeral and
cemetery merchandise and services and cemetery property interment rights. Revenue is measured based on the consideration specified in a contract with a
customer and is net of any sales incentives
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and amounts collected on behalf of third parties. The consideration (including any discounts) is allocated among separate products and services in a package
based on their relative stand-alone selling prices. The stand-alone selling price is determined by management based upon local market conditions and reasonable
ranges for both merchandise and services, which is the best estimate of the stand-alone price. For items that are not sold separately (e.g., second interment
rights), we estimate stand-alone selling prices using the best estimate of market value, using inputs such as average selling price and list price broken down by
each geographic location. Additionally, we consider typical sales promotions that could impact the stand-alone selling price estimates.
Pursuant to state law, all or a portion of the proceeds from funeral and cemetery merchandise or services sold on a pre-need basis may be required to be paid into
trust funds. We defer investment earnings related to these merchandise and service trusts until the associated merchandise is delivered or services are performed.
A portion of the proceeds from the sale of cemetery property interment rights is required by state law to be paid by us into perpetual care trust funds to maintain
the cemetery. The portion of these proceeds are not recognized as revenue. Investment earnings from these trusts are distributed to us regularly and recognized
in current cemetery revenue.
Inaccuracies in our records of the timing of physical delivery of our merchandise and services can have a material impact on our financial position, results of
operations or cash flows.
Deferred Revenues
Revenues from the sale of services and merchandise, as well as any investment income from the merchandise trusts, are deferred until such time as the services
are performed or the merchandise is delivered. In addition to amounts deferred on new contracts, investment income and unrealized gains and losses on our
merchandise trusts are recognized as deferred revenues. Deferred revenues also include deferred revenues from pre-need sales that we acquired through our
various acquisitions, and we provide a profit margin for these deferred revenues to account for the projected future costs of delivering products and providing
services on these acquired pre-need contracts.
Inaccuracies in our records of the timing of physical delivery of our merchandise and services can have a material impact on our financial position, results of
operations or cash flows.
For further details on our deferred revenues, see Part II, Item 8. Financial Statements and Supplementary Data – Note 1 General and Note 13 Deferred Revenues
and Costs.
Allowance for Doubtful Accounts
Accounts receivable is presented net of an allowance for doubtful accounts. The allowance for doubtful accounts is determined by applying a cancellation rate to
amounts included in accounts receivable. The cancellation rate is based upon a five year average rate by each specific location.
Inaccuracies in the judgements made in determining the cancelation rate can have a material impact on our financial position, results of operations or cash flows.
For further details on our allowance for doubtful accounts, see Part II, Item 8. Financial Statements and Supplementary Data – Note 1 General and Note 3
Accounts Receivable, Net of Allowance.
Other-Than-Temporary Impairment of Trust Assets
Assets held in our merchandise trusts are carried at fair value. Any change in unrealized gains and losses is reflected in the carrying value of the assets and is
recognized as deferred revenue. Any and all investment income streams, including interest, dividends or gains and losses from the sale of trust assets, are offset
against deferred revenue until such time that we deliver the underlying merchandise. Investment income generated from our merchandise trust is included in
"Cemetery investment and other revenues".
Pursuant to state law, a portion of the proceeds from the sale of cemetery property is required to be paid into perpetual care trusts. All principal must remain in
this trust in perpetuity while interest and dividends may be released and used to defray cemetery maintenance costs, which are expensed as incurred. Assets in
our perpetual care trusts are carried at fair value. Any change in unrealized gains and losses is reflected in the carrying value of the assets and is offset against
perpetual care trust corpus.
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We evaluate whether or not the assets in our merchandise and perpetual care trusts have an other-than-temporary impairment on a security-by-security basis. We
determine whether or not the impairment of a fixed maturity debt security is other-than-temporary by evaluating each of the following:
•
Whether it is our intent to sell the security. If there is intent to sell, the impairment is considered to be other-than-temporary.
•
If there is no intent to sell, we evaluate whether it is not more likely than not we will be required to sell the debt security before its anticipated
recovery. If we determine that it is more likely than not that we will be required to sell an impaired investment before its anticipated recovery, the
impairment is considered to be other-than-temporary.
We further evaluate whether or not all assets in the trusts have other-than-temporary impairments based upon a number of criteria including the severity of the
impairment, length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer.
If an impairment is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair value. For assets held in the perpetual
care trusts, any reduction in the cost basis due to an other-than-temporary impairment is offset with an equal and opposite reduction in the perpetual care trust
corpus and has no impact on earnings. For assets held in the merchandise trusts, any reduction in the cost basis due to an other-than-temporary impairment is
recorded in deferred revenue.
Inaccuracies in the judgements made in assessing our intent to sell and severity of impairment and in analyzing the changes in market conditions and concerns
related to an asset’s issuer can have a material impact on our financial position, results of operations or cash flows.
For further details on our other-than-temporary impairment of our trust assets, see Part II, Item 8. Financial Statements and Supplementary Data – Note 1
General, Note 6 Merchandise Trusts and Note 7 Perpetual Care Trusts.
Trust Investments – Direct Loans
The trusts, may, from time to time, extend credit to third party companies as part of its overall investment strategy. The amounts outstanding on loans are
referred to as direct loans and are included in trust investments on the consolidated balance sheets. It is the trusts’ expectation that the loans originated will be
held for the foreseeable future or until maturity. In certain situations, for example to manage concentrations and/or credit risk, some or all of certain exposures
may be sold. Loans for which the trusts have the intent and ability to hold for the foreseeable future or until maturity are classified as held for investment
(“HFI”). If a trust no longer has the intent or ability to hold a loan for the foreseeable future, then the loan is transferred to held for sale (“HFS”). Loans entered
into with the intent to resell are classified as HFS.
The trusts account for direct loans at amortized cost, net of unamortized origination fees, if any. The trusts evaluate the collectability of both interest and
principal for each loan to determine whether it is impaired. A loan is considered to be impaired when, based on current information and events, a trust
determines it is probable that it will be unable to collect amounts due according to the existing contractual terms. When a loan is considered to be impaired, the
amount of loss is calculated by comparing the carrying value of the financial asset to the value determined by discounting the expected future cash flows at the
loan’s effective interest rate or to the estimated fair value of the underlying collateral, less costs to sell, if the loan is collateralized and the applicable trust
expects repayment to be provided solely by the collateral. Impairment assessments require significant judgments and are based on significant assumptions
related to the borrower’s credit risk, financial performance, expected sales, and estimated fair value of the collateral.
For further details on our trust investments in direct loans, see Part II, Item 8. Financial Statements and Supplementary Data – Note 1 General, Note 6
Merchandise Trusts and Note 7 Perpetual Care Trusts.
Valuation of long-lived assets
We assess our long-lived assets, such as definite-lived intangible assets and property and equipment, for impairment whenever events or circumstances indicate
that the carrying amount of an asset may not be recoverable. We do not have indefinite-lived assets. If the carrying value of an asset exceeds its fair value, we
record an impairment charge that reduces our earnings.
We apply various valuation techniques, such as the income approach or sales comparison approach, to determine the fair values of our long-lived assets. In
evaluating our long-lived assets for recoverability, we consider current market conditions and our intent with respect to holding or disposing of the assets. The
factors used in our evaluations for recoverability and the inputs we
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use in applying the valuation technique we select are highly subjective and very sensitive to changes in the underlying assumptions. Changes in economic and
operating conditions or our intent with regard to our long-lived assets that occurs subsequent to our impairment analyses could impact these assumptions and
result in future impairments of our long-lived assets.
Inaccuracies made in the judgements discussed above in determining the fair value of long-lived assets can have a material impact on our financial position,
results of operations or cash flows.
For further details on our intangible assets see Part II, Item 8. Financial Statements and Supplementary Data – Note 1 General.
Income Taxes
We are subject to both federal and state income taxes. We record deferred tax assets and liabilities to recognize temporary differences between the bases of assets
and liabilities in our tax and GAAP balance sheets and for federal and state NOL carryforwards and alternative minimum tax credits. We record a valuation
allowance against our deferred tax assets, if we deem that it is more likely than not that some portion or all of the recorded deferred tax assets will not be
realizable in future periods.
In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including our past operating results, recent
cumulative losses and our forecast of future taxable income. In determining future taxable income, we make assumptions regarding the amount of taxable
income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require us to make
significant judgments about our forecasts of our future taxable income and are consistent with the plans and estimates we use to manage our business. Any
reduction in estimated future taxable income may require us to record an additional valuation allowance against our deferred tax assets. An increase in the
valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.
As of December 31, 2021, we had federal and state NOL carryforwards of approximately $477.0 million and $618.0 million, respectively, a portion of which
expires annually. We believe the Recapitalization Transactions caused a “change of control” for income tax purposes under the applicable provisions of the
Internal Revenue Code of 1986, as amended, which may significantly limit our ability to use such federal NOL carryforwards to offset future taxable income.
The “change of control” rules limit the annual net operating loss deduction in a given year to an amount based on the value of the Company on the change date
multiplied by the federal tax exempt bond rate. This makes it more likely for the Company to pay some amount of income tax in the years it has positive taxable
income. This limitation also makes it more likely for NOL carryovers to expire unutilized.
For further details on our income taxes, see Part II, Item 8. Financial Statements and Supplementary Data – Note 1 General and Note 12 Income Taxes.
Contingencies
We are party to various legal proceedings in the ordinary course of our business, as well as class and collective actions under the Exchange Act and for related
state law claims that certain of our officers and directors breached their fiduciary duty to the Partnership and its unitholders. We accrue for contingencies when
the occurrence of a material loss is probable and can be reasonably estimated, based on our best estimate of the expected liability. The accuracy of the estimates
used to determine probability and amount of a potential future liability is impacted by, among other things, the complexity of the issues and the amount of due
diligence we have been able to perform.
Differences between the actual settlement costs, final judgments or fines and our estimates could have a material impact on our financial position, results of
operations or cash flows.
For further details on our contingencies, see Part II, Item 8. Financial Statements and Supplementary Data–Note 14 Commitments and Contingencies.
Insurance loss reserves
We purchase comprehensive general liability, professional liability, automobile liability and workers’ compensation insurance coverages structured with high
deductibles. This high-deductible insurance program means we are primarily self-insured for claims and associated costs and losses covered by these policies.
Historical insurance industry experience indicates a high degree of inherent variability in assessing the ultimate amount of losses associated with casualty
insurance claims. This is especially true with respect to liability and workers’ compensation exposures due to the extended period of time that transpires between
when
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the claim might occur and the full settlement of such claim, which is often many years. We continually evaluate loss estimates associated with claims and losses
related to these insurance coverages falling within the deductible of each coverage.
We analyze and adjust our insurance loss reserve, using assumptions based on factors such as claim settlement patterns, claim development trends, claim
frequency and severity patterns, inflationary trends and data reasonableness that impact our analysis and determination of the “best estimate” of the projected
ultimate claim losses.
Differences between actual insurance loss settlements and our insurance loss reserves could have a material impact on our financial position, results of
operations or cash flows.
Recent Accounting Pronouncements and Accounting Changes
For discussion of recent accounting pronouncements and accounting changes, see Part II, Item 8. Financial Statements and Supplementary Data–Note 1
General.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market
risks. The term "market" risk refers to the risk of gains or losses arising from changes in interest rates and prices of marketable securities. The disclosures are not
meant to be precise indicators of expected future gains or losses, but rather indicators of reasonably possible gains or losses. This forward-looking information
provides indicators of how we view and manage our ongoing market risk exposures. All of our market risk-sensitive instruments were entered into for purposes
other than trading.
The trusts are invested in assets with the primary objective of maximizing income and distributable cash flow for trust distributions, while maintaining an
acceptable level of risk. Certain asset classes in which we invest for the purpose of maximizing yield are subject to an increased market risk. This increased
market risk will create volatility in the unrealized gains and losses of the trust assets from period to period.
For additional information on the investments in our merchandise trusts and perpetual trusts, see Part II, Item 8. Financial Statements and Supplementary Data –
Note 6 Merchandise Trusts and Note 7 Perpetual Care Trusts of this Annual Report.
INTEREST-BEARING INVESTMENTS
The interest-bearing investments in our merchandise trusts and perpetual care trusts that are subject to interest rate sensitivity consist of fixed-income securities,
money market investments and other short-term investments. As of December 31, 2021, the accumulated fair value of the interest-bearing investments in our
merchandise trusts and perpetual care trusts was $51.2 million and $25.7 million, respectively, or 9.0% and 7.6% of the fair value of our total trust assets,
respectively.
MARKETABLE EQUITY SECURITIES
The marketable equity securities in our merchandise trusts and perpetual care trusts that are subject to market price sensitivity consist of individual equity
securities as well as closed and open-ended mutual funds. As of December 31, 2021, the accumulated fair value of the marketable equity securities in our
merchandise trusts and perpetual care trusts was $16.0 million and $8.4 million, respectively, or 2.8% and 2.5% of the fair value of our total trust assets,
respectively.
OTHER INVESTMENT FUNDS
Other investment funds are measured at fair value using the net asset value per share practical expedient. This asset class is composed of fixed income funds and
equity funds, which have a redemption period ranging from one to 30 days, and private credit funds, which have lockup periods ranging from zero to fifteen
years with four potential one year extensions at the discretion of the funds’ general partners. This asset class has an inherent valuation risk as the values provided
by investment fund managers may not represent the liquidation values obtained by the trusts upon redemption or liquidation of the fund assets. As of December
31, 2021, the fair value of other investment funds in our merchandise trusts and perpetual care trusts represented 84.4% and 87.8%, respectively, of the fair value
of total trust assets. The fair market value of the holdings in these funds was $479.1 million and $297.6 million in our merchandise trusts and perpetual care
trusts, respectively, as of December 31, 2021, based on net asset value quotes.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
STONEMOR INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248)
42
Consolidated Balance Sheets as of December 31, 2021 and 2020
44
Consolidated Statements of Operations for the Years Ended December 31, 2021 and 2020
45
Consolidated Statements of Owners’ Equity for the Years Ended December 31, 2021 and 2020
46
Consolidated Statements of Cash Flow for the Years Ended December 31, 2021 and 2020
47
Notes to Consolidated Financial Statements
48
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
StoneMor Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of StoneMor Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December
31, 2021 and 2020, the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the two years in the period
ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in
all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the
two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were
we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal
control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to
be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our
especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial
statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the
accounts or disclosures to which it relates.
Impairment Evaluation of Loan Held for Investment
As described in Note 6, Note 7, and Note 17 to the financial statements, the Company, through its merchandise and perpetual care trust funds, enters into
financing arrangements in the form of direct loans, which are measured at amortized cost and classified as loans held for investment. These loans are included in
the Other investment funds category of the Company’s merchandise and perpetual care trusts footnote disclosures. Included in the Company’s investments is a
$30 million participation in a debt facility issued by an affiliate of the Company who recently emerged from bankruptcy. The loan matures in 2024 and its
interest is fully paid-in-kind. The Company evaluates its direct loans for impairment and considers a loan to be impaired when, based on current information and
events, it determines it is probable that it will be unable to collect amounts due according to the existing contractual terms. Considering the contractual
repayment terms of the loan, the Company engaged outside specialists to independently estimate the value of the loan and its collateral and concluded that the
loan was not impaired. We identified the Company’s evaluation of the loan for potential impairment as a critical audit matter.
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The principal consideration for our determination that the evaluation of the loan for potential impairment is a critical audit matter is that the estimation of the
investment’s fair value by management requires significant judgments and is based on significant assumptions relating to the discount rate applied in the fair
value model, market multiples selected, and prospective financial information used in estimating the fair value of the loan’s collateral.
Our audit procedures related to the Company’s evaluation of the loan for potential impairment included the following, among others:
•
We conducted walkthroughs of the design and implementation of controls relating to the Company’s monitoring activities, evaluation for potential
impairment, and disclosure of related party transactions.
•
We tested management’s process to evaluate potential impairment indicators with respect to the loan, including the determination to engage an
outside specialist.
•
With the assistance of valuation specialists, we tested the Company’s estimate of the fair value of the loan and its underlying collateral, including
evaluating the reasonableness of significant assumptions such as the discount rate, market multiples, and prospective financial information
impacting the valuation of the loan’s collateral. We also evaluated the qualifications of management’s specialist and the appropriateness of
methodology utilized.
•
We agreed inputs to the financial information and capitalization tables used in the valuation to supporting documentation.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2018.
Philadelphia, Pennsylvania
March 31, 2022
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STONEMOR INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
December 31,
December 31,
2021
2020
Assets
Current assets:
Cash and cash equivalents, excluding restricted cash
$
83,882
$
39,244
Restricted cash
16,415
20,846
Accounts receivable, net of allowance
62,220
57,869
Prepaid expenses
6,971
5,290
Assets held for sale
—
28,575
Other current assets
11,459
16,884
Total current assets
180,947
168,708
Long-term accounts receivable, net of allowance
72,309
75,301
Cemetery property
296,758
299,526
Property and equipment, net of accumulated depreciation
82,610
83,496
Merchandise trusts, restricted, at fair value
567,853
501,453
Perpetual care trusts, restricted, at fair value
339,138
312,228
Deferred selling and obtaining costs
124,023
116,900
Deferred tax assets
21
9
Intangible assets, net
54,023
55,094
Other assets
23,462
22,248
Total assets
$
1,741,144
$
1,634,963
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities
$
44,704
$
51,718
Liabilities held for sale
—
23,406
Accrued interest
4,344
95
Current portion, long-term debt
762
317
Total current liabilities
49,810
75,536
Long-term debt, net of deferred financing costs
389,401
320,715
Deferred revenues
1,056,260
949,164
Deferred tax liabilities
10,878
29,652
Perpetual care trust corpus
339,138
312,228
Other long-term liabilities
41,399
40,081
Total liabilities
1,886,886
1,727,376
Commitments and contingencies
Stockholders' equity:
Common stock, par value $0.01 per share, 200,000,000 shares authorized, 118,290,600 and 117,871,141 shares
issued and outstanding, respectively
1,182
1,178
Paid-in capital in excess of par value
(83,286 )
(85,232 )
Accumulated deficit
(63,638 )
(8,359 )
Total stockholders' equity
(145,742 )
(92,413 )
Total liabilities and stockholders' equity
$
1,741,144
$
1,634,963
See Accompanying Notes to the Consolidated Financial Statements.
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STONEMOR INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year Ended December 31,
2021
2020
Revenues:
Cemetery:
Interments
$
85,734
$
67,853
Merchandise
68,095
60,600
Services
70,314
65,701
Investment and other
54,807
43,732
Funeral home:
Merchandise
22,949
21,637
Services
20,943
20,016
Total revenues
322,842
279,539
Costs and Expenses:
Cost of goods sold
51,746
40,119
Cemetery expense
76,464
68,654
Selling expense
58,962
49,668
General and administrative expense
42,018
37,970
Corporate overhead
39,930
35,975
Depreciation and amortization
8,082
9,152
Funeral home expenses:
Merchandise
6,285
5,872
Services
19,283
18,078
Other
12,974
10,839
Total costs and expenses
315,744
276,327
Loss on sale of business and other impairments
(2,307 )
—
Other (losses) gains, net
(1,016 )
129
Operating income
3,775
3,341
Interest expense
(38,974 )
(45,537 )
Loss on debt extinguishment
(40,128 )
—
Loss from continuing operations before income taxes
(75,327 )
(42,196 )
Income tax benefit
18,370
4,855
Net loss from continuing operations
(56,957 )
(37,341 )
Discontinued operations (Note 2):
Income from operations of discontinued businesses
1,678
28,982
Income tax expense
—
—
Net income from discontinued operations
1,678
28,982
Net loss
$
(55,279 )
$
(8,359 )
Net loss from continuing operations per common share (basic)
$
(0.48 )
$
(0.35 )
Net income from discontinued operations per common share (basic)
0.01
0.27
Net loss per common share (basic)
$
(0.47 )
$
(0.08 )
Net loss from continuing operations per common share (diluted)
$
(0.48 )
$
(0.35 )
Net income from discontinued operations per common share (diluted)
0.01
0.27
Net loss per common share (diluted)
$
(0.47 )
$
(0.08 )
Weighted average number of common shares outstanding - basic
117,998
106,991
Weighted average number of common shares outstanding - diluted
117,998
106,991
See Accompanying Notes to the Consolidated Financial Statements.
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STONEMOR INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
Series A Preferred Stock
Common Stock
Number of
Series A
Preferred
Shares
Par Value of
Series A
Preferred
Shares
Number of
Common
Shares
Par Value of
Common
Shares
Paid-in
Capital in
Excess of Par
Value
Accumulated
Deficit
Total
December 31, 2019
— $
—
94,447,356 $
944 $
(103,434 ) $
— $
(102,490 )
Issuance of Series A Preferred Stock
176
—
—
—
8,800
—
8,800
Exchange of Series A Preferred Stock for Common Stock
(176 )
—
12,054,795
121
(121 )
—
—
Issuance of Common stock
—
—
11,232,877
112
8,088
—
8,200
Common stock awards under incentive plans
—
—
136,113
1
1,435
—
1,436
Net loss
—
—
—
—
—
(8,359 )
(8,359 )
December 31, 2020
—
—
117,871,141
1,178
(85,232 )
(8,359 )
(92,413 )
Common stock awards under incentive plans
—
—
454,159
4
2,032
—
2,036
Common stock repurchased related to incentive plans
—
—
(34,700 )
—
(86 )
—
(86 )
Net loss
—
—
—
—
—
(55,279 )
(55,279 )
December 31, 2021
— $
—
118,290,600 $
1,182 $
(83,286 ) $
(63,638 ) $
(145,742 )
See Accompanying Notes to the Consolidated Financial Statements.
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STONEMOR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2021
2020
Cash Flows From Operating Activities:
Net loss
$
(55,279 )
$
(8,359 )
Adjustments to reconcile net loss to net cash provided by operating activities:
Cost of lots sold
6,351
5,796
Depreciation and amortization
8,122
9,395
Provision for bad debt
6,354
6,275
Non-cash compensation expense
2,036
1,481
Loss on debt extinguishment
40,128
—
Non-cash interest expense
4,341
17,884
Loss (gain) on sale of businesses
1,486
(29,429 )
Other losses (gains), net
1,016
(129 )
Changes in assets and liabilities:
Payment of paid-in-kind interest
(18,440 )
—
Accounts receivable, net of allowance
(17,529 )
(20,453 )
Merchandise trust fund
(36,992 )
(25,988 )
Other assets
1,070
1,675
Deferred selling and obtaining costs
(8,005 )
(6,376 )
Deferred revenues
87,770
61,611
Deferred taxes, net
(18,786 )
(4,888 )
Payables and other liabilities
(1,017 )
(7,135 )
Net cash provided by operating activities
2,626
1,360
Cash Flows From Investing Activities:
Cash paid for capital expenditures
(11,995 )
(6,360 )
Proceeds from divestitures
6,979
57,343
Net cash (used in) provided by investing activities
(5,016 )
50,983
Cash Flows From Financing Activities:
Proceeds from issuance of Series A Preferred Stock - related party
—
8,800
Proceeds from issuance of Common Stock - related party
—
8,200
Proceeds from borrowings
406,235
3,672
Repayments of debt
(332,203 )
(63,915 )
Principal payment on finance leases
(1,401 )
(1,561 )
Early redemption premium
(18,478 )
—
Cost of financing activities
(11,470 )
(4,170 )
Shares repurchased related to share-based compensation
(86 )
(46 )
Net cash provided by (used in) financing activities
42,597
(49,020 )
Net increase in cash, cash equivalents and restricted cash
40,207
3,323
Cash, cash equivalents and restricted cash—Beginning of period
60,090
56,767
Cash, cash equivalents and restricted cash—End of period
$
100,297
$
60,090
Supplemental disclosure of cash flow information:
Cash paid during the period for interest
$
48,739
$
29,212
Cash paid during the period for income taxes
2,908
1,154
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
1,917
$
3,187
Operating cash flows from finance leases
337
421
Financing cash flows from finance leases
1,401
1,561
Non-cash investing and financing activities:
Right-of-use assets obtained in exchange for new operating lease liabilities
$
3,425
$
467
Right-of-use assets obtained in exchange for new finance lease liabilities
334
62
Accrued paid-in-kind interest on 2024 Notes
—
10,572
See Accompanying Notes to the Consolidated Financial Statements.
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STONEMOR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
GENERAL
As used in this Annual Report on Form 10-K (the “Annual Report”), unless the context otherwise requires, references to the terms the “Company,” “StoneMor,”
“we,” “us,” and “our” refer to StoneMor Inc. and its consolidated subsidiaries.
Nature of Operations
StoneMor Inc. is a leading provider of funeral and cemetery products and services in the death care industry in the U.S. As of December 31, 2021, the Company
operated 300 cemeteries in 24 states and Puerto Rico, of which 271 were owned and 29 were operated under lease, management or operating agreements. The
Company also owned and operated 69 funeral homes, including 33 located on the grounds of cemetery properties that the Company owns, in 15 states and
Puerto Rico.
The Company’s cemeteries provide cemetery property interment rights, such as burial lots, lawn and mausoleum crypts, and cremation niches. Cemetery
merchandise is comprised of burial vaults, caskets, grave markers and memorials and cemetery services, which include the installation of this merchandise and
other service items. The Company sells these products and services both at the time of death, which is referred to as at-need, and prior to the time of death,
which is referred to as pre-need.
The Company’s funeral home services include family consultation, the removal and preparation of remains, insurance products and the use of funeral home
facilities for visitation and memorial services.
Basis of Presentation and Principles of Consolidation
The consolidated financial statements included in this Annual Report have been prepared in accordance with Generally Accepted Accounting Principles
(“GAAP”). All intercompany transactions and balances have been eliminated.
The consolidated financial statements include the accounts of each of the Company’s 100% owned subsidiaries. These statements also include the accounts of
the merchandise and perpetual care trusts in which the Company has a variable interest and is the primary beneficiary. The Company operates 29 cemeteries
under long-term leases, operating agreements and management agreements. The operations of 16 of these managed cemeteries have been consolidated.
The Company operates 13 cemeteries under long-term leases and other agreements that do not qualify as acquisitions for accounting purposes. As a result, the
Company did not consolidate all of the existing assets and liabilities related to these cemeteries. The Company has consolidated the existing assets and liabilities
of the merchandise and perpetual care trusts associated with these cemeteries as variable interest entities, since the Company controls and receives the benefits
and absorbs any losses from operating these trusts. Under the long-term leases and other agreements associated with these properties, which are subject to
certain termination provisions, the Company is the exclusive operator of these cemeteries and earns revenues related to sales of merchandise, services and
interment rights and incurs expenses related to such sales, including the maintenance and upkeep of these cemeteries. Upon termination of these agreements, the
Company will retain all of the benefits and related contractual obligations incurred from sales generated during the agreement period. The Company has also
recognized the existing customer contract-related performance obligations that it assumed as part of these agreements.
Axar Letter
On September 27, 2021, the Company announced that it had received a letter (the “Letter”) dated September 22, 2021 from Axar Capital Management, LP
(“Axar”) in which Axar expressed an interest in pursuing discussions concerning strategic alternatives that may be beneficial to the Company and its various
stakeholders. Axar has engaged Schulte Roth & Zabel LLP as its legal advisor and stated in the Letter that it would engage a financial advisor at the appropriate
time. According to the Letter, Axar expected that any such discussions would be conducted with a special committee of the Board of Directors of the Company
(the “Board”), assisted by financial and legal advisors engaged by such committee. The Letter also stated that any transaction involving Axar arising from such
discussions would be conditioned upon, among other things, approval of the special committee and the Board, the negotiation and execution of mutually
satisfactory definitive agreements and customary terms. The Letter also stated that any transaction structured as a take-private transaction would be subject to a
closing condition that the approval of holders of a majority of the outstanding shares not owned by Axar or its affiliates be obtained. On September 26, 2021, the
Board authorized its Conflicts Committee, which is comprised of independent directors Stephen J. Negrotti, Kevin Patrick and Patricia
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Wellenbach, to engage in the discussions contemplated by the Letter, including the authority to engage in discussions concerning and to negotiate the terms and
provisions of any strategic alternative the Conflicts Committee determines to be appropriate in connection with such discussions. Under its charter, the Conflicts
Committee has the authority to reject, approve or recommend that the Board approve any transaction that is a related party transaction, which would include any
transaction to which Axar is a party. The Conflicts Committee has retained independent legal and financial advisors to assist in such discussions. Following
receipt of the Letter and until recently, the Conflicts Committee and its counsel had engaged in discussions with Axar and Axar’s counsel, which evolved to
focus on a potential offer by Axar to acquire the shares of the Company that are not owned by Axar or its affiliates. While these negotiations had been
productive, the Conflicts Committee and Axar had not come to agreement on any price that Axar would pay for such shares or on certain other terms of any
transaction, and there can be no assurance that any agreement would be reached in the future. Negotiations between the Conflicts Committee and Axar were
recently tabled in light of the work undertaken by the Conflicts Committee with respect to the independent review of certain investments by our trusts in which
Axar had an interest. See Part III, Item 13. Certain Relationships and Related Transactions, and Director Independence.
The Conflicts Committee may at any time determine to resume such negotiations, but there can be no assurance that even if such negotiations are resumed, any
agreement with respect to a take-private transaction will be executed or that this or any other transaction will be approved or consummated. The Company does
not undertake any obligation to provide any updates with respect to these matters except as required under applicable law.
Refinancing
On May 11, 2021, the Company issued $400.0 million aggregate principal amount of 8.500% Senior Secured Notes due 2029 (the “2029 Notes”). The gross
proceeds from the sale of the 2029 Notes was $389.9 million, less advisor fees, legal fees, mortgage costs and other closing expenses. The 2029 Notes were
issued pursuant to an indenture (the “2029 Indenture”), dated as of May 11, 2021, by and among the Company, the guarantors named therein and Wilmington
Trust, National Association, as trustee and collateral agent. Substantially concurrently with the closing of the offering of the 2029 Notes, StoneMor Partners, L.P.
(the “Partnership”) and Cornerstone Family Services of West Virginia Subsidiary, Inc. (collectively, the “2024 Issuers”) deposited from the net cash proceeds
from the offering of the 2029 Notes an amount sufficient to fund the full redemption of the outstanding 9.875%/11.500% Senior Secured PIK Toggle Notes due
2024 (the “2024 Notes”) with Wilmington Trust, National Association (the “2024 Trustee”) as trustee under the Indenture, dated as of June 27, 2019 (as
amended, the “2024 Indenture”), among the 2024 Issuers, the guarantors party thereto and the 2024 Trustee governing the 2024 Notes. Upon deposit of such
funds with the 2024 Trustee, the 2024 Indenture was satisfied and discharged in accordance with its terms. As a result of the satisfaction and discharge of the
2024 Indenture, the 2024 Issuers and the guarantors of the 2024 Notes, including the Company, have been released from their obligations with respect to the
2024 Indenture and the 2024 Notes, except with respect to those provisions of the 2024 Indenture that, by their terms, survive the satisfaction and discharge of
the 2024 Indenture. Refer to Note 9 Long-Term Debt for more detailed information.
COVID-19 Pandemic
In December 2019, an outbreak of a novel strain of coronavirus (“COVID-19”) spread worldwide posing public health risks that reached pandemic proportions
(including the effect of variants that have developed, the “COVID-19 Pandemic”). The COVID-19 Pandemic poses a significant threat to the health and
economic wellbeing of the Company’s employees, customers and vendors. The Company’s operations are deemed essential by the state and local governments
in which it operates, with the exception of Puerto Rico, and the Company has been working with federal, state and local government officials to ensure that it
continues to satisfy their requirements for offering the Company’s essential services.
Like most businesses world-wide, the COVID-19 Pandemic has impacted the Company financially. At the start of the COVID-19 Pandemic in early 2020, the
Company saw its pre-need sales and at-need sales activity decline as Americans practiced social distancing and crowd size restrictions were put in place.
However, since May 2020, the Company experienced at-need sales growth, and since late 2020, it has experienced pre-need sales growth. The Company
believes the implementation of its virtual meeting tools early on in the COVID-19 Pandemic was one of several key steps that had mitigated this disruption.
Throughout the COVID-19 Pandemic, the Company’s cemeteries and funeral homes have largely remained open and available to serve its families in all the
locations in which it operates to the extent permitted by local authorities and the Company expects that this will continue. The Company has leveraged the
relationships it has made with the families it has served during its response to the COVID-19 Pandemic, which has directly resulted in new sales leads and the
increase in pre-need sales activity. In addition, as community restrictions have eased and the COVID-19 vaccine became more widely available, the Company
has experienced growth in its pre-need cemetery sales.
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The Company expects the COVID-19 Pandemic could have an adverse effect on its future results of operations and cash flows depending on COVID-19 variants
and case counts. However, the Company cannot presently predict the likely scope and severity of that impact. In the event there are confirmed diagnoses of
COVID-19 within a significant number of its facilities, the Company may incur additional costs related to the closing and subsequent cleaning of these facilities
and the ability to adequately staff the impacted sites. In addition, the Company’s pre-need customers with installment contracts could default on their installment
contracts due to lost work or other financial stresses arising from the COVID-19 Pandemic. Alternatively, in the event that COVID-19 case counts continue to
normalize and variants become less severe, we would expect to see a reduction in the demand for at-need products and services as well as a reduction in pre-
need turning to at-need.
Summary of Significant Accounting Policies
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions as
described in this Annual Report. These estimates and assumptions may affect the reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. As a result,
actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less from the time they are acquired to be cash
equivalents. Cash and Cash Equivalents was $83.9 million and $39.2 million as of December 31, 2021 and December 31, 2020, respectively.
Restricted Cash
Cash that is restricted from withdrawal or use under the terms of certain contractual agreements is recorded as restricted cash. Restricted Cash was $16.4 million
and $20.8 million as of December 31, 2021 and 2020, respectively, which primarily related to cash collateralization of the Company’s letters of credit and surety
bonds.
Revenues
The Company’s revenues are derived from contracts with customers through sale and delivery of death care products and services. Primary sources of revenue
are derived from (1) cemetery and funeral home operations generated both at-need and pre-need, which are classified on the consolidated statements of
operations as Interments, Merchandise and Services, (2) investment income, which includes income earned on assets maintained in perpetual care and
merchandise trusts related to pre-need sales of cemetery and funeral home merchandise and services that are required to be maintained in the trust by state law
and (3) interest earned on pre-need installment contracts. Investment income is presented within Investment and other for Cemetery revenue and Services for
Funeral home revenue. Revenue is measured based on the consideration specified in a contract with a customer and is net of any sales incentives and amounts
collected on behalf of third parties. Pre-need contracts are price guaranteed, providing for future merchandise and services at prices prevailing when the
agreements are signed.
Investment income is earned on certain payments received from customers on pre-need contracts, which are required by law to be deposited into the
merchandise and service trusts. Amounts are withdrawn from the merchandise trusts when the Company fulfills the performance obligations. Earnings on these
trust funds, which are specifically identifiable for each performance obligation, are also included in total transaction price. Pre-need contracts are generally
subject to financing arrangements on an installment basis, with a contractual term not to exceed 60 months. Interest income is recognized utilizing the effective
interest method. For those contracts that do not bear a market rate of interest, the Company imputes such interest based upon the prime rate at the time of
origination plus 375 basis points in order to segregate the principal and interest component of the total contract value. The Company has elected to not adjust the
transaction price for the effects of a significant financing component for contracts that have payment terms under one year.
At the time of a non-cancellable pre-need sale, the Company records an account receivable in an amount equal to the total contract value less unearned finance
income and any cash deposit paid. The revenue from both the sales and interest income from trusted funds are deferred until the merchandise is delivered or the
services are performed. For a sale in a cancellable state, an account receivable is only recorded to the extent control has transferred to the customer for interment
rights, merchandise or services for which the Company has not collected cash. The amounts collected from customers in states in which pre-need contracts are
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cancellable may be subject to refund provisions. The Company estimates the fair value of its refund obligation under such contracts on a quarterly basis and
records such obligations within other long-term liabilities line item on its consolidated balance sheets.
In accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”), the Company recognizes revenue in
the amount to which the Company expect to be entitled to when it satisfies a performance obligation by transferring control over a product or service to a
customer. The Company only recognizes amounts due from a customer for unfulfilled performance obligations on a cancellable pre-need contract to the extent
that control has transferred to the customer for interments, merchandise or services for which the Company has not collected cash. The Company defers the
recognition of any nonrefundable up-front fees and incremental direct selling costs associated with its sales contracts with a customer (i.e., commissions and
bonuses) until the underlying goods or services have been delivered to the customer if the amortization period associated with the deferred nonrefundable up-
front fees and incremental direct selling is greater than a year; otherwise, these nonrefundable up-front fees and incremental direct selling costs are expensed
immediately. Incremental direct selling costs are recognized by specific identification. The Company calculates the deferred selling costs asset by dividing total
deferred selling and obtaining expenses by total deferrable revenues and multiplying such percentage by the periodic change in gross deferred revenues. Such
costs are recognized when the associated performance obligation is fulfilled based upon the net change in deferred revenues. All other selling costs are expensed
as incurred.
In addition, the Company maintains a reserve representing the fair value of the refund obligation that may arise due to state law provisions that include a
guarantee of customer funds collected on unfulfilled performance obligations and maintained in trust to the extent that the funds are refundable upon a
customer’s exercise of any cancellation rights.
Sales taxes assessed by governmental authorities are excluded from revenue. Any shipping and handling costs that are incurred after control over a product has
transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold.
Nature of Goods and Services
The following is a description of the principal activities within the Company’s two reportable segments from which the Company generates its revenue.
Cemetery Operations
The Company generates revenues in its Cemetery Operations segment principally from (1) providing rights to inter remains in a specific cemetery property
inventory space such as burial lots and constructed mausoleum crypts (“Interments”), (2) sales of cemetery merchandise which includes markers (i.e., method of
identifying a deceased person in a burial space, crypt or niche), base (i.e., the substrate upon which a marker is placed), vault (i.e., a container installed in the
burial lot in which the casket is placed), caskets, cremation niches and other cemetery related items and (3) service revenues, including opening and closing, a
service of digging and refilling burial spaces to install the burial vault and place the casket into the vault, cremation services and fees for installation of cemetery
merchandise. Products and services may be sold separately or in packages. For packages, the Company accounts for individual products and services separately
as they are distinct (i.e., the product or service is separately identifiable from other items in the package and the customer can benefit from it on its own or with
other resources that are readily available to the customer). The consideration (including any discounts) is allocated among separate products and services in a
package based on their relative stand-alone selling prices. The stand-alone selling price is determined by management based upon local market conditions and
reasonable ranges for both merchandise and services which is the best estimate of the stand-alone price. For items that are not sold separately (e.g., second
interment rights), the Company estimates stand-alone selling prices using the best estimate of market value, using inputs such as average selling price and list
price broken down by each geographic location. Additionally, the Company considers typical sales promotions that could have impacted the stand-alone selling
price estimates.
Interments revenue is recognized when control transfers, which is when the property is available for use by the customer. For pre-construction mausoleum
contracts, the Company will only recognize revenue once the property is constructed and the customer has obtained substantially all of the remaining benefits of
the property.
Merchandise revenue and deferred investment earnings on merchandise trusts are recognized when a customer obtains control of the product. This usually
occurs when the customer takes possession of the product (title has transferred to the customer and the merchandise is either installed or stored, at the direction
of the customer, at the vendor’s warehouse or a third-party warehouse at no additional cost to the Company). The amount of revenue recognized is adjusted for
expected refunds, which are estimated
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based on applicable law, general business practices and historical experience observed specific to the respective performance obligation. The estimate of the
refund obligation is reevaluated on a quarterly basis. In addition, the Company is entitled to retain, in certain jurisdictions, a portion of collected customer
payments when a customer cancels a pre-need contract; these amounts are also recognized in revenue at the time the contract is cancelled.
Service revenue is recognized when the services are performed and the performance obligation is thereby satisfied.
The cost of goods sold related to merchandise and services reflects the actual cost of purchasing products and performing services and the value of cemetery
property depleted through the recognized sales of interment rights. The costs related to the sales of lots and crypts are determined systematically using a specific
identification method under which the total value of the underlying cemetery property and the lots available to be sold at the location are used to determine the
cost per lot.
Funeral Home Operations
The Company generates revenues in its Funeral Home Operations segment principally generates revenue from (1) sales of funeral home merchandise which
includes caskets and other funeral related items and (2) service revenues, including services such as family consultation, the removal of and preparation of
remains and the use of funeral home facilities for visitation and services of remembrance. The Funeral Home Operations segment also include revenues related
to the sale of term and whole life insurance on an agency basis, in which the Company earns a commission from the sales of these policies. Insurance
commission revenue is reported within service revenues. Products and services may be sold separately or in packages. For packages, the Company accounts for
individual products and services separately as they are distinct (i.e., the product or service is separately identifiable from other items in the package and the
customer can benefit from it on its own or with other resources that are readily available to the customer). The consideration (including any discounts) is
allocated among separate products and services based on their relative stand-alone selling prices. The relative stand-alone selling price is determined by
management's best estimate of the stand-alone price based upon the list price at each location. The revenue generated by the Company through its Funeral Home
Operations segment is principally derived from at-need sales.
Merchandise revenue is recognized when a customer obtains control of the product. This usually occurs when the customer takes possession of the product (title
has transferred to the customer and the merchandise is either installed or stored, at the direction of the customer, at the vendor’s warehouse or a third-party
warehouse). The amount of revenue recognized is adjusted for expected refunds, which are estimated based on applicable law, general business practices and
historical experience observed specific to the respective performance obligations. The estimate of the refund obligation is reevaluated on a quarterly basis.
Service revenue is recognized when the services are performed and the performance obligation is thereby satisfied.
Costs related to the delivery or performance of merchandise and services are charged to expense when merchandise is delivered or services are performed.
Deferred Revenues
Revenues from the sale of services and merchandise as well as any investment income from the merchandise trusts is deferred until such time that the services
are performed or the merchandise is delivered. In addition, for amounts deferred on new contracts and investment income and unrealized gains on the
Company’s merchandise trusts, deferred revenues include deferred revenues from pre-need sales that were entered into by entities prior to the Company’s
acquisition of the assets of those entities. The Company provides for a profit margin for these deferred revenues to account for the projected future costs of
delivering products and providing services on pre-need contracts that the Company acquired through acquisition. These revenues and their associated costs are
recognized when the related merchandise is delivered or services are performed and are presented on a gross basis on the consolidated statements of operations.
Accounts Receivable, Net of Allowance
The Company sells pre-need cemetery contracts whereby the customer enters into arrangements for future pre-need merchandise and services. These sales are
usually made using interest-bearing installment contracts not to exceed 60 months. The interest income is recorded as revenue when the interest amount is
considered realizable and collectible, which typically coincides with cash payment. Interest income is not recognized until payments are collected in accordance
with the contract. At the time of a pre-need sale, the Company records an account receivable in an amount equal to the total contract value less unearned finance
income, unfulfilled performance obligations on cancellable contracts, and any cash deposit paid. The Company recognizes an allowance for doubtful accounts
by applying a cancellation rate to amounts included in accounts receivable, which is recorded as
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a reduction in accounts receivable and a corresponding offset to deferred revenues. The cancellation rate is based on a five year average rate by each specific
location. Management evaluates customer receivables for impairment based upon its historical experience, including the age of the receivables and the
customers’ payment histories.
Cemetery Property
Cemetery property consists of developed and undeveloped cemetery land, constructed mausoleum crypts and lawn crypts and other cemetery property. Cemetery
property is stated at cost or, upon acquisition of a business, at the fair value of the assets acquired.
Property and Equipment
Property and equipment is stated at cost or, upon acquisition of a business, at the fair value of the assets acquired and depreciated on a straight-line basis.
Maintenance and repairs are charged to expense as incurred, whereas additions and major replacements are capitalized and depreciation is recorded over their
estimated useful lives. Major classifications of property and equipment and their respective useful lives are as follows:
Buildings and improvements
10 to 40 years
Software and computer hardware
3 years
Furniture and equipment
3 to 10 years
Leasehold improvements
over the shorter of the term of the lease or the life of the asset
Assets Held for Sale and Discontinued Operations
For a long-lived asset or disposal group to be classified as held for sale all of the following criteria must be met
•
Management, having authority to approve the action, commits to a plan to sell the long-lived asset or disposal group;
•
The long-lived asset or disposal group is available for immediate sale in its present condition, subject only to terms that are usual and customary for
sales of such long-lived assets (disposal groups);
•
An active program to locate a buyer(s) and other actions required to complete the plan to sell the long-lived asset (disposal group) have been initiated;
•
The sale of the long-lived asset (disposal group) is probable and transfer of the long-lived asset (disposal group) is expected to qualify for recognition
as a completed sale within one year;
•
The long-lived asset (disposal group) is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and
•
Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
The determination to classify a site (or group of sites) as an asset held for sale requires estimates by the Company about the site and the level of market activity
in which the site is based. Such estimates are based on factors that include recent sales of comparable sites, the extent of buyers’ interest in the site and the site’s
condition. Based on these factors, the Company assesses the probability of divesting of the site under current market conditions at an acceptable price within one
year. After the Company identifies a site to be held for sale, the Company discontinues depreciating the long-lived assets associated with the site and estimates
the assets’ fair value, net of selling costs. If the carrying value of the assets to be classified as held for sale exceeds the Company’s estimated net fair value, the
Company writes the assets down to the estimated net fair value. Assets and liabilities associated with the site to be classified as held for sale are presented
separately in the Company’s consolidated balance sheets beginning with the period in which the Company decided to classify the site as held for sale.
A component of an entity that is disposed of by sale or abandonment is reported as discontinued operations if the transaction represents a strategic shift that will
have a major effect on an entity's operations and financial results. The results of discontinued operations are aggregated and presented separately in the
Company’s consolidated statement of operations. Assets and liabilities of the discontinued operations are aggregated and reported separately as assets and
liabilities held for sale in the Company’s consolidated balance sheet, including the comparative prior year period.
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Amounts presented in discontinued operations are from the consolidated financial statements and accounting records using the historical basis of assets,
liabilities, and historical results of the discontinued operations and exclude general corporate allocations.
For further details of the Company’s assets held for sale and discontinued operations, see Note 2 Acquisitions and Divestitures.
Merchandise Trusts
Pursuant to state law, a portion of the proceeds from pre-need sales of merchandise and services is put into trust (the “merchandise trust”) until such time that the
Company meets the requirements for releasing trust principal, which is generally delivery of merchandise or performance of services. All investment earnings
generated by the assets in the merchandise trusts (including realized gains and losses) are deferred until the associated merchandise is delivered or the services
are performed. For further details of the Company’s merchandise trusts, see Note 6 Merchandise Trusts.
Perpetual Care Trusts
Pursuant to state law, a portion of the proceeds from the sale of cemetery property is required to be paid into perpetual care trusts. The perpetual care trust
principal does not belong to the Company and must remain in this trust in perpetuity, while interest and dividends may be released and used to defray cemetery
maintenance costs, which are expensed as incurred. The Company consolidates the trust into its financial statements because the trust is considered a variable
interest entity for which the Company is the primary beneficiary. Earnings from the perpetual care trusts are recognized in current cemetery revenues. For
further details of the Company’s perpetual care trusts, see Note 7 Perpetual Care Trusts.
Fair Value Measurements
The Company measures the available-for-sale securities held by its merchandise and perpetual care trusts at fair value on a recurring basis. Fair value is the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company
utilizes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the
valuation of the asset or liability as of the measurement date. The three levels are defined as follows:
•
Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets;
•
Level 2 – inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and
•
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The categorization of the asset or liability within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Reclassifications of fair value between Level 1, Level 2 and Level 3 of the fair value hierarchy, if applicable, are made at the end of each quarter. For additional
disclosures on the Company’s available-for-sale securities, refer to Note 6 Merchandise Trusts and Note 7 Perpetual Care Trusts.
Inventories
Inventories are classified within Other current assets on the Company’s consolidated balance sheets and include cemetery and funeral home merchandise valued
at the lower of cost or net realizable value. Cost is determined primarily on a specific identification basis using a first-in, first-out method. Inventories were
approximately $3.7 million and $6.0 million at December 31, 2021 and 2020, respectively.
Impairment of Long-Lived Assets
The Company monitors the recoverability of long-lived assets, including cemetery property, property and equipment and other assets, based on estimates using
factors such as current market value, future asset utilization, business and regulatory climate and future undiscounted cash flows expected to result from the use
of the related assets, at a location level. The Company’s policy is to perform the long-lived asset impairment test prescribed by ASC 360, Property, Plant and
Equipment, every reporting period for all of its cemetery property and funeral home locations. Any location that has an operating loss for the current reporting
period, a trend of operating losses over the current fiscal year and/or a trend of operating losses over the previous five fiscal years
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is tested for recoverability. If the carrying value of any of the Company’s locations is not recoverable, as a result of the sum of expected future undiscounted
cash flows for the location being less than the carrying value of the location, the Company records an impairment charge to write-down the location to its fair
value.
Other-Than-Temporary Impairment of Trust Assets
The Company determines whether or not the impairment of a fixed maturity debt security is other-than-temporary by evaluating each of the following:
•
Whether it is the Company’s intent to sell the security. If there is intent to sell, the impairment is considered to be other-than-temporary.
•
If there is no intent to sell, the Company evaluates if it is not more likely than not that it will be required to sell the debt security before its anticipated
recovery. If the Company determines that it is more likely than not that it will be required to sell an impaired investment before its anticipated
recovery, the impairment is considered to be other-than-temporary.
The Company further evaluates whether or not all assets in the trusts have other-than-temporary impairments based upon a number of criteria including the
severity of the impairment, length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If an
impairment is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair value.
For assets held in the perpetual care trusts, any reduction in the cost basis due to an other-than-temporary impairment is offset with an equal and opposite
reduction in the perpetual care trust corpus and has no impact on earnings.
For assets held in the merchandise trusts, any reduction in the cost basis due to an other-than-temporary impairment is recorded in deferred revenue.
Trust Investments – Direct Loans
The trusts, may, from time to time, extend credit to third party companies as part of its overall investment strategy. The amounts outstanding on loans are
referred to as direct loans and are included in trust investments on the consolidated balance sheets. It is the trusts’ expectation that the loans originated will be
held for the foreseeable future or until maturity. In certain situations, for example to manage concentrations and/or credit risk, some or all of certain exposures
may be sold. Loans for which the trusts have the intent and ability to hold for the foreseeable future or until maturity are classified as held for investment
(“HFI”). If a trust no longer has the intent or ability to hold a loan for the foreseeable future, then the loan is transferred to held for sale (“HFS”). Loans entered
into with the intent to resell are classified as HFS.
The trusts account for direct loans at amortized cost, net of unamortized origination fees, if any. The trusts evaluate the collectability of both interest and
principal for each loan to determine whether it is impaired. A loan is considered to be impaired when, based on current information and events, a trust
determines it is probable that it will be unable to collect amounts due according to the existing contractual terms. When a loan is considered to be impaired, the
amount of loss is calculated by comparing the carrying value of the financial asset to the value determined by discounting the expected future cash flows at the
loan’s effective interest rate or to the estimated fair value of the underlying collateral, less costs to sell, if the loan is collateralized and the applicable trust
expects repayment to be provided solely by the collateral. Impairment assessments require significant judgments and are based on significant assumptions
related to the borrower’s credit risk, financial performance, expected sales, and estimated fair value of the collateral.
Allowance for Loan Losses on Trust Direct Loans
The allowance for loan losses is intended to provide for loan losses inherent in the finance receivables portfolio and is periodically reviewed for adequacy
considering credit quality indicators, including expected and historical losses and levels of and trends in past due loans, non-performing assets and impaired
loans, collateral values and economic conditions. The allowance for loan losses is determined based on specific allowances for loans that are impaired, based
upon the value of underlying collateral or projected cash flows. Changes to the allowance for loan losses are recorded in the provision for loan credit losses in
the consolidated statement of income. It should be noted that any allowance does not get reflected in the income statement on day one but rather an adjustment
to the balance sheet in deferred revenue. Refer to “Revenues” and “Deferred Revenues” above for further clarification.
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Direct loans are reported at their determined principal balances net of any unearned income, cumulative charge-offs and unamortized deferred fees and costs.
Unearned income and deferred fees and costs are amortized to interest income based on all cash flows expected using the effective interest method.
Intangible Assets
The Company has acquired intangible assets, most of which have been recognized as a result of acquisitions and long-term lease, management and operating
agreements. The Company amortizes these intangible assets over their estimated useful lives and periodically tests them for impairment whenever events or
changes in circumstances indicate that the carrying value may be greater than fair value and therefore not fully recoverable. For further details of the Company’s
intangible assets, see Note 8 Intangible Assets.
Income Taxes
The Company is subject to U.S. federal income taxes, and a provision for U.S. federal income tax has been provided in the consolidated statements of operations
for the years ended December 31, 2021 and 2020. The Company is also responsible for certain state income and franchise taxes in the states in which it operates.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis and tax carryforwards, if applicable. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date.
The Company recognizes interest accrued related to unrecognized tax benefits, if any, in income tax expense in the consolidated statements of operations. For
further details of the Company’s income taxes, see Note 12 Income Taxes.
Stock-Based Compensation
The Company has a long-term incentive plan under which it is authorized to grant stock-based compensation awards, such as restricted stock or restricted units
to be settled in common stock and non-qualified stock options (“stock options”). The Company recognizes compensation expense in an amount equal to the fair
value of the stock-based awards on the date of grant over the requisite service period. The fair value of restricted stock awards and restricted stock unit awards is
determined based on the number of restricted stock or restricted stock units granted and the closing price of the Company’s common stock on the date of grant.
The fair value of stock options is determined by applying the Black-Scholes model to the grant-date market value of the underlying common stock of the
Company. The Company has elected to recognize forfeiture credits for these stock-based compensation awards as they are incurred, as this method best reflects
actual stock-based compensation expense.
Tax deductions on the stock-based compensation awards are not realized until the stock-based compensation awards are vested or exercised. The Company
recognizes deferred tax assets for stock-based compensation awards that will result in future deductions on its income tax returns, based on the amount of stock-
based compensation recognized at the statutory tax rate in the jurisdiction in which the Company will receive a tax deduction. If the tax deduction for a stock-
based compensation award is greater than the cumulative GAAP compensation expense for that stock-based compensation award upon realization of a tax
deduction, an excess tax benefit will be recognized and recorded as a favorable impact on the effective tax rate. If the tax deduction for a stock-based
compensation award is less than the cumulative GAAP compensation expense for that stock-based compensation award upon realization of the tax deduction, a
tax shortfall will be recognized and recorded as an unfavorable impact on the effective tax rate. Any excess tax benefits or shortfalls will be recorded discretely
in the period in which they occur. The cash flows resulting from any excess tax benefit will be classified as financing cash flows in the Company’s consolidated
statements of cash flows.
The Company provides its employees with the election to settle the income tax obligations arising from the vesting of their restricted stock-based compensation
awards by the Company withholding stock equal to such income tax obligations. Stock acquired from employees in connection with the settlement of the
employees’ income tax obligations on these stock-based compensation awards are accounted for as treasury shares that are subsequently retired. Restricted stock
awards, restricted stock units and stock options are not considered issued and outstanding for purposes of earnings per share calculations until vested.
For further details of the Company’s stock-based compensation plans, see Note 11 Long-Term Incentive Plan.
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Leases
The Company leases a variety of assets throughout its organization, such as office space, funeral homes, warehouses and equipment. The Company has both
operating and finance leases. The Company’s operating leases primarily include office space, funeral homes and equipment. The Company’s finance leases
primarily consist of vehicles and certain IT equipment. The Company determines whether an arrangement is or contains a lease at the inception of the
arrangement based on the facts and circumstances in each contract. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the
Company recognizes lease expense for these leases on a straight-line basis over the lease term. For lease agreements with an initial term in excess of 12 months,
the Company records the lease liability and Right of Use (“ROU”) asset at commencement date based upon the present value of the sum of the remaining
minimum rental payments, which exclude executory costs. Certain adjustments to the ROU asset may be required for items such as initial direct costs paid or
incentives received.
Certain leases provide the Company with the option to renew for additional periods, with renewal terms that can extend the lease term for periods ranging from
1 to 30 years. Where leases contain escalation clauses, rent abatements and/or concessions, the Company applies them in the determination of lease expense.
The exercise of lease renewal options is at the Company’s sole discretion, and the Company only includes the renewal option in the lease term when the
Company can be reasonably certain that it will exercise the additional options.
As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the
commencement date in determining the present value of lease payments. The Company evaluates the term of the lease, type of asset and its weighted average
cost of capital to determine its incremental borrowing rate used to measure the ROU asset and lease liability.
The Company calculates operating lease expense ratably over the lease term plus any reasonably assured renewal periods. The Company considers reasonably
assured renewal options, fixed escalation provisions and residual value guarantees in its calculation. Leasehold improvements are amortized over the shorter of
the lease term or asset life, which may include renewal periods where the renewal is reasonably assured, and are included in the determination of straight-line
rent expense. The depreciable life of assets and leasehold improvements are generally limited by the expected lease term.
The Company’s leases also typically have lease and non-lease components, which are generally accounted for separately and not included in the measurement of
the ROU asset and lease liability.
Net Loss per Common Share (Basic and Diluted)
Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted net loss per common share is calculated by dividing net loss attributable to common shares by the sum of the weighted-
average number of outstanding common shares and the dilutive effect of share-based awards, as calculated by the treasury stock or if converted methods, as
applicable. These awards consist of common shares that are contingently issuable upon the satisfaction of certain vesting conditions for stock awards granted
under the Company’s long-term incentive plan.
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The following table sets forth the reconciliation of the Company’s weighted-average number of outstanding common shares as of December 31, 2021 and 2020
used to compute basic net loss attributable to common shares with those used to compute diluted net loss per common share, (in thousands):
Year Ended December 31,
2021
2020
Weighted average number of outstanding common shares—basic
117,998
106,991
Plus effect of dilutive incentive awards
Restricted shares
—
—
Stock options
—
—
Weighted average number of outstanding common shares—diluted
117,998
106,991
For the year ended December 31, 2021, the diluted weighted-average number of outstanding common shares does not include 1,282,555 shares issuable
upon the exercise of outstanding options and 230,489 restricted common shares as their effects would have been anti-dilutive. For the year ended
December 31, 2020, the diluted weighted-average number of outstanding common shares does not include 3,577,850 shares issuable upon the exercise of
outstanding options and 338,345 restricted common shares as their effects would have been anti-dilutive.
Advertising Costs
Advertising costs are expensed as incurred. For the years ended December 31, 2021 and 2020, advertising costs were $8.5 million and $6.3 million, respectively.
Recently Issued Accounting Standard Updates - Not Yet Effective
Credit Losses
In June 2016, FASB issued ASU No. 2016-13, Credit Losses (Topic 326) ("ASU 2016-13"). The core principle of ASU 2016-13 is that all assets measured at
amortized cost basis should be presented at the net amount expected to be collected using historical experience, current conditions and reasonable and
supportable forecasts as a basis for credit loss estimates, instead of the probable initial recognition threshold used under current GAAP. In November 2018,
FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses (“ASU 2018-09”), which clarified that
receivables arising from operating leases are not within the scope of Accounting Standards Codification (“ASC”) 326-20, Financial Instruments-Credit Losses-
Measured at Amortized Cost, and should be accounted for in accordance with ASC 842, Leases. In April 2019, FASB issued ASU No. 2019-04, Codification
Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (“ASU 2019-04”),
which includes clarifications to the amendments issued in ASU 2016-13. In May 2019, FASB issued ASU No. 2019-05, Financial Instruments-Credit Losses
(Topic 326), which provides entities that have certain instruments within the scope of ASC 326-20 with an option to irrevocably elect the fair value option in
ASC 825, Financial Instruments, upon adoption of ASU 2016-13. In November 2019, FASB issued ASU No. 2019-10, Financial Instruments-Credit Losses
(Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) (“ASU 2019-10”), which modifies the effective dates for ASU 2016-13, ASU 2017-
12 and ASU 2016-02 to reflect the FASB’s new policy of staggering effective dates between larger public companies and all other companies. With the issuance
of ASU 2019-10, the Company’s effective date for adopting all amendments related to the new credit loss standard has been extended to January 1, 2023. In
November 2019, FASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses (“ASU 2019-11”), which
includes clarifications to and addresses specific stakeholders’ issues concerning the amendments issued in ASU 2016-13. In February 2020, FASB issued ASU
No, 2020-02, Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842) and in March 2020 issued ASU No. 2020-03, Codification Improvements
to Financial Instruments, both of which also provide updates and clarification. The Company plans to adopt the requirements of these amendments upon their
effective date of January 1, 2023, using the modified-retrospective method and is evaluating the potential impact of the adoption on its financial position, results
of operations and related disclosures.
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2.
ACQUISITIONS AND DIVESTITURES
On March 23, 2021, the Company signed a definitive agreement to acquire four cemeteries located within its east coast geographic footprint for a total purchase
price of $5.4 million, subject to customary working capital adjustments. The acquisition of two of these cemeteries closed on January 31, 2022, and the
remaining two cemeteries are expected to close in the second quarter of 2022. Refer to Note 20 Subsequent Events for more information on this and other
acquisition activity occurring after December 31, 2021.
In the fourth quarter of 2019, the Company launched an asset sale program designed to divest assets at attractive multiples, reduce debt levels and improve cash
flow and liquidity. The following divestitures have resulted from this program.
On January 3, 2020, the Company sold substantially all of the assets of Oakmont Memorial Park, Oakmont Funeral Home, Redwood Chapel, Inspiration Chapel
and Oakmont Crematory located in California pursuant to the terms of an asset sale agreement (the “Oakmont Agreement”) with Carriage Funeral Holdings, Inc.
for an aggregate cash purchase price of $33.0 million (the “Oakmont Sale”). The divested assets consisted of one cemetery, one funeral home and certain related
assets. The Oakmont Sale resulted in a gain of $24.4 million, which is included in the accompanying consolidated statement of operations for the year ended
December 31, 2020. Net proceeds from the sale were used to redeem an aggregate $30.3 million principal amount of the 2024 Notes as required by the 2024
Indenture.
On April 7, 2020, the Company completed the sale of substantially all of the assets of the cemetery, funeral establishment and crematory commonly known as
Olivet Memorial Park, Olivet Funeral and Cremation Services and Olivet Memorial Park & Crematory pursuant to the terms of an asset sale agreement (the
“Olivet Agreement”) with Cypress Lawn Cemetery Association for an aggregate cash purchase price of $25.0 million, subject to certain adjustments (the “Olivet
Sale”), and the assumption of certain liabilities, including $17.1 million in land purchase obligations. The Olivet Sale resulted in a gain of $7.2 million, which is
included in the accompanying statements of operations for the year ended December 31, 2020. The Company used net proceeds of $20.5 million to redeem
additional 2024 Notes as required by the 2024 Indenture.
On November 3, 2020, the Company completed the sale of substantially all of the Company’s remaining California properties, consisting of five cemeteries, six
funeral establishments and four crematories (the “Remaining California Assets”) pursuant to the terms of an asset sale agreement (the “California Agreement”)
with certain entities owned by John Yeatman and Guy Saxton for a cash purchase price of $7.1 million, subject to certain closing adjustments (the “Remaining
California Sale” and together with the Olivet Sale, the “Total California Sale”). The Company used net proceeds of $5.7 million to redeem $5.6 million in
principal amount of additional 2024 Notes as required by the 2024 Indenture.
On April 2, 2021, the Company completed the sale of substantially all of the Company’s assets in Oregon and Washington, consisting of nine cemeteries, ten
funeral establishments and four crematories (the “Clearstone Assets”) pursuant to the terms of an asset sale agreement entered into on November 6, 2020 (the
“Clearstone Agreement”) with Clearstone Memorial Partners, LLC for a net cash purchase price of $6.2 million, subject to certain adjustments (the “Clearstone
Sale”). The Company redeemed $6.7 million in principal amount of additional 2024 Notes as required by the 2024 Indenture.
The Clearstone Agreement to sell the Clearstone Assets, together with the other divestitures completed in 2020 described above, represented a strategic exit from
the west coast. Therefore, the results of operations of the Clearstone Assets, and of the businesses sold in 2020 for the period before their respective sales, have
been presented as discontinued operations on the accompanying consolidated statements of operations for the years ended December 31, 2021 and 2020.
Additionally, all of the assets and liabilities associated with the Clearstone Assets have been classified as held for sale on the accompanying consolidated
balance sheet at December 31, 2020.
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The following table summarizes the results of discontinued operations for the years ended December 31, 2021 and 2020 (in thousands):
Year Ended December 31,
2021
2020
Cemetery revenues
$
1,499
$
8,551
Funeral home revenues
1,244
8,277
Cost of goods sold
(192 )
(1,425 )
Cemetery expense
(245 )
(2,478 )
Selling expense
(265 )
(2,416 )
General and administrative expense
(188 )
(2,274 )
Depreciation and amortization
(40 )
(243 )
Funeral home expenses
(790 )
(6,565 )
Interest expense
(166 )
(1,874 )
Income (loss) from discontinued operations before income taxes
857
(447 )
Net gain on sale of businesses
821
29,429
Income tax expense
—
—
Net income from discontinued operations
$
1,678
$
28,982
The following table summarizes the major classes of assets and liabilities that have been classified as held for sale in the consolidated balance sheets as of
December 31, 2020 (in thousands):
December 31, 2020
Clearstone
Other
Total
Assets
Current assets:
Accounts receivable, net of allowance
$
230
$
—
$
230
Other current assets
104
—
104
Total current assets held for sale
334
—
334
Long-term accounts receivable, net of allowance
193
—
193
Cemetery property
3,492
350
3,842
Property and equipment, net of accumulated depreciation
2,529
—
2,529
Merchandise trusts, restricted, at fair value
14,831
—
14,831
Perpetual care trusts, restricted, at fair value
4,518
—
4,518
Deferred selling and obtaining costs
1,865
—
1,865
Other assets
463
—
463
Total assets held for sale
$
28,225
$
350
$
28,575
Liabilities
Current liabilities:
Accounts payable and accrued liabilities
$
51
$
—
$
51
Total current liabilities held for sale
51
—
51
Deferred revenues
18,456
—
18,456
Perpetual care trust corpus
4,518
—
4,518
Other long-term liabilities
381
—
381
Total liabilities held for sale
$
23,406
$
—
$
23,406
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The following table presents the depreciation and amortization, capital expenditures, sale proceeds and significant operating noncash items of the discontinued
operations as of December 31, 2021 and 2020 (in thousands):
Year Ended December 31,
2021
2020
Cash flows from discontinued operating activities:
Depreciation and amortization
$
40
$
243
Gains on sales of discontinued operations businesses
821
29,429
Cash flows from discontinued investing activities:
Capital expenditures
$
17
$
51
Proceeds from sales of discontinued businesses
6,979
57,342
On May 24, 2021, the Company completed the sale of three cemetery properties located in Missouri for a total purchase price of $720,000 (the “Missouri Sale”),
resulting in a loss on sale of $1.8 million, which is included in Loss on sale of businesses and other impairments on the accompanying consolidated statement of
operations for the year ended December 31, 2021.
3.
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE
Long-term accounts receivable, net, consisted of the following at the dates indicated (in thousands):
December 31, 2021
December 31, 2020
Customer receivables
$
154,664
$
154,903
Unearned finance income
(14,319 )
(16,022 )
Allowance for doubtful accounts
(5,816 )
(5,711 )
Accounts receivable, net of allowance
134,529
133,170
Less: Current portion, net of allowance
62,220
57,869
Long-term portion, net of allowance
$
72,309
$
75,301
Activity in the allowance for doubtful accounts was as follows (in thousands):
December 31, 2021
December 31, 2020
Balance, beginning of period
$
5,711
$
5,884
Provision for doubtful accounts
6,354
6,275
Charge-offs, net
(6,249 )
(6,267 )
Amounts related to assets held for sale
—
(181 )
Balance, end of period
$
5,816
$
5,711
Management evaluates customer receivables for impairment based upon its historical experience, including the age of the receivables and the customers’
payment histories.
4.
CEMETERY PROPERTY
Cemetery property consisted of the following at the dates indicated (in thousands):
December 31, 2021
December 31, 2020
Cemetery land
$
229,736
$
232,548
Mausoleum crypts and lawn crypts
67,022
66,978
Cemetery property
$
296,758
$
299,526
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5.
PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at the dates indicated (in thousands):
December 31, 2021
December 31, 2020
Buildings and improvements
$
115,141
$
112,345
Furniture and equipment
54,099
53,199
Funeral home land
10,932
11,005
Property and equipment, gross
180,172
176,549
Less: Accumulated depreciation
(97,562 )
(93,053 )
Property and equipment, net of accumulated depreciation
$
82,610
$
83,496
Depreciation expense was $7.0 million and $8.0 million for the years ended December 31, 2021 and 2020, respectively.
6.
MERCHANDISE TRUSTS
At December 31, 2021 and 2020 the Company’s merchandise trusts consisted of investments in debt and equity marketable securities and cash equivalents, both
directly and through mutual and investment funds. All of these investments are carried at fair value. All of these investments are subject to the fair value
hierarchy and considered either Level 1 or Level 2 assets pursuant to the three-level hierarchy described in Note 16 Fair Value. There were no Level 3 assets in
the Company’s merchandise trusts. When the Company receives a payment from a pre-need customer, the Company deposits the amount required by law into
the merchandise trusts that may be subject to cancellation on demand by the pre-need customer. The Company’s merchandise trusts related to states in which
pre-need customers may cancel contracts with the Company comprises 47.8% of the total merchandise trust as of December 31, 2021. The merchandise trusts
are variable interest entities (“VIE”) of which the Company is deemed the primary beneficiary. The assets held in the merchandise trusts are required to be used
to purchase the merchandise and provide the services to which they relate. If the value of these assets falls below the cost of purchasing such merchandise and
providing such services, the Company may be required to fund this shortfall.
The Company included $10.3 million and $10.0 million of investments held in trust as required by law by the West Virginia Funeral Directors Association at
December 31, 2021 and 2020, respectively, in its merchandise trust assets. These trusts are recognized at their account value, which approximates fair value.
A reconciliation of the Company’s merchandise trust activities for the years ended December 31, 2021 and 2020 is presented below (in thousands):
Year ended December 31,
2021
2020
Balance—beginning of period
$
516,284
$
523,865
Contributions
63,112
51,409
Distributions
(86,918 )
(82,059 )
Interest and dividends
44,629
34,232
Capital gain distributions
12,578
2,330
Realized gains and losses, net
28,004
(1,232 )
Other than temporary impairment
(136 )
(26,714 )
Taxes
(303 )
(408 )
Fees
(6,888 )
(7,077 )
Unrealized change in fair value
(2,509 )
21,938
Total
567,853
516,284
Less: Assets held for sale
—
(14,831 )
Balance—end of period
$
567,853
$
501,453
During the years ended December 31, 2021 and 2020, purchases of available for sale securities were approximately $77.6 million and $52.9 million,
respectively. During the years ended December 31, 2021 and 2020, sales, maturities and paydowns of available for sale securities were approximately $42.1
million and $56.4 million, respectively. Cash flows from pre-need contracts are presented as operating cash flows in the Company’s consolidated statement of
cash flows.
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The cost and market value associated with the assets held in the merchandise trusts as of December 31, 2021 and 2020 were as follows (in thousands):
December 31, 2021
Fair Value
Hierarchy
Level
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Short-term investments
1
$
51,243 $
— $
— $
51,243
Fixed maturities:
U.S. governmental securities
2
1
—
—
1
Corporate debt securities
2
—
1
—
1
Other debt securities
2
—
—
—
—
Total fixed maturities
1
1
—
2
Mutual funds—debt securities
1
6,097
81
(15 )
6,163
Mutual funds—equity securities
1
1,021
245
—
1,266
Other investment funds
457,447
26,008
(4,398 )
479,057
Equity securities
1
14,696
3,316
(2,051 )
15,961
Other invested assets
2
3,766
103
—
3,869
Total investments
534,271
29,754
(6,464 )
557,561
West Virginia Trust Receivable
9,992
300
—
10,292
Total
$
544,263 $
30,054 $
(6,464 ) $
567,853
Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair
value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts
presented in the Company’s consolidated balance sheet. This asset class includes fixed income funds and equity funds, which have redemption
periods ranging from 1 to 30 days, and private credit funds, which have lockup periods of zero to fifteen years with three potential one year
extensions at the discretion of the funds’ general partners. As of December 31, 2021, there were $112.4 million in unfunded investment commitments
to the private credit funds, which are callable at any time. This asset class also includes $125.4 million of direct loans which are accounted for at
amortized cost, net of unamortized origination fees, if any, and are categorized as Level 3 investments in the fair value hierarchy. The interest rates on
these direct loans are consistent with market rates, and their amortized cost approximates fair value.
December 31, 2020
Fair Value
Hierarchy
Level
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Short-term investments
1
$
41,039 $
12 $
— $
41,051
Fixed maturities:
U.S. governmental securities
2
1
—
—
1
Corporate debt securities
2
2,818
638
—
3,456
Other debt securities
2
23,165
1,578
(1,332 )
23,411
Total fixed maturities
25,984
2,216
(1,332 )
26,868
Mutual funds—debt securities
1
6,097
306
—
6,403
Mutual funds—equity securities
1
26,356
43
(154 )
26,245
Other investment funds
337,565
32,461
(8,812 )
361,214
Equity securities
1
35,055
5,544
(19 )
40,580
Other invested assets
2
3,875
79
—
3,954
Total investments
475,971
40,661
(10,317 )
506,315
West Virginia Trust Receivable
10,190
—
(221 )
9,969
Total
$
486,161 $
40,661 $
(10,538 ) $
516,284
Less: Assets held for sale
(14,831 )
Total
$
486,161 $
40,661 $
(10,538 ) $
501,453
Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair
value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts
presented in the Company’s consolidated balance sheet. This asset class is composed of fixed income funds and equity funds, which have redemption
periods ranging from 1 to 30 days, and private credit funds, which have lockup periods of zero to five years with three potential one year extensions
at the discretion of the funds’ general partners. As of December 31, 2020, there were $47.8 million in unfunded investment commitments to the
private credit funds, which are callable at any time.
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The contractual maturities of debt securities as of December 31, 2021 and 2020 were as follows (in thousands):
December 31, 2021
Less than
1 year
1 year
through
5 years
6 years
through
10 years
More than
10 years
U.S. governmental securities
$
— $
1 $
— $
—
Corporate debt securities
—
1
—
—
Other debt securities
—
—
—
—
Total fixed maturities
$
— $
2 $
— $
—
December 31, 2020
Less than
1 year
1 year
through
5 years
6 years
through
10 years
More than
10 years
U.S. governmental securities
$
— $
1 $
— $
—
Corporate debt securities
—
3,456
—
—
Other debt securities
18,392
5,019
—
—
Total fixed maturities
$
18,392 $
8,476 $
— $
—
Temporary Declines in Fair Value
The Company evaluates declines in fair value below cost for each asset held in the merchandise trusts on a quarterly basis.
An aging of unrealized losses on the Company’s investments in debt and equity securities within the merchandise trusts as of December 31, 2021 and 2020 is
presented below (in thousands):
Less than 12 months
12 months or more
Total
December 31, 2021
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fixed maturities:
U.S. governmental securities
$
— $
— $
297 $
— $
297 $
—
Corporate debt securities
—
—
620
—
620
—
Other debt securities
—
—
—
—
—
—
Total fixed maturities
—
—
917
—
917
—
Mutual funds—debt securities
890
15
—
—
890
15
Mutual funds—equity securities
—
—
—
—
—
—
Other investment funds
42,645
4,398
—
—
42,645
4,398
Equity securities
3,108
2,050
1
1
3,109
2,051
Total
$
46,643 $
6,463 $
918 $
1 $
47,561 $
6,464
Less than 12 months
12 months or more
Total
December 31, 2020
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fixed maturities:
U.S. governmental securities
$
— $
— $
— $
— $
— $
—
Corporate debt securities
—
—
—
—
—
—
Other debt securities
18,392
1,332
—
—
18,392
1,332
Total fixed maturities
18,392
1,332
—
—
18,392
1,332
Mutual funds—debt securities
—
—
—
—
—
—
Mutual funds—equity securities
128
154
—
—
128
154
Other investment funds
75,799
8,812
—
—
75,799
8,812
Equity securities
82
19
—
—
82
19
Total
$
94,401 $
10,317 $
— $
— $
94,401 $
10,317
For all securities in an unrealized loss position, the Company evaluated the severity of the impairment and length of time that a security has been in a loss
position and concluded the decline in fair value below the asset’s cost was temporary in nature. In addition, the Company is not aware of any circumstances that
would prevent the future market value recovery for these securities.
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Other-Than-Temporary Impairment of Trust Assets
The Company assesses its merchandise trust assets for other-than-temporary declines in fair value on a quarterly basis. During the year ended December 31,
2021, the Company determined, based on its review, that there were 6 securities with an aggregate cost basis of approximately $0.3 million and an aggregate fair
value of approximately $0.2 million, resulting in an impairment of $0.1 million, with such impairment considered to be other-than-temporary due to credit
indicators. During the year ended December 31, 2020, the Company determined, based on its review, that there were 57 securities with an aggregate cost basis
of approximately $106.4 million and an aggregate fair value of approximately $79.7 million, resulting in an impairment of $26.7 million, with such impairment
considered to be other-than-temporary due to credit indicators. Accordingly, the Company adjusted the cost basis of these assets to their current value and offset
these changes against deferred merchandise trust revenue. These adjustments to deferred revenue will be reflected within the Company’s consolidated
statements of operations in future periods as the underlying merchandise is delivered or the underlying service is performed.
Impairment of Direct Loans
On a quarterly basis, the merchandise trusts evaluate the carrying value of each direct loan for impairment. A direct loan is considered impaired when, based on
current information and events, it is determined that the trusts will not be able to collect the amounts due according to the loan contract, including scheduled
interest payments. This evaluation is generally based on delinquency information, an assessment of the borrower’s financial condition and the adequacy of
collateral, if any. The trusts would generally place direct loans on nonaccrual status when the full and timely collection of interest or principal becomes uncertain
and they are 90 days past due for interest or principal, unless the direct loan is both well-secured and in the process of collection. When placed on nonaccrual,
the trusts would reverse any accrued unpaid interest receivable against interest income and amortization of any net deferred fees is suspended. Generally, the
trusts would return a direct loan to accrual status when all delinquent interest and principal become current under the terms of the credit agreement and
collectability of remaining principal and interest is no longer doubtful. In certain circumstances, the trusts may place a direct loan on nonaccrual status but
conclude it is not impaired. The trusts may retain independent third-party valuations on such nonaccrual positions to support impairment decisions.
When the trusts identify a direct loan as impaired, they measure the impairment based on the present value of expected future cash flows, discounted at the
receivable’s effective interest rate, or the estimated fair value of the collateral, less estimated costs to sell. If it is determined that the value of an impaired
receivable is less than the recorded investment, the trusts would recognize impairment with a charge to deferred revenue. When the value of the impaired loan is
calculated by discounting expected cash flows, interest income would be recognized using the loan’s effective interest rate over the remaining life of the loan.
The trusts individually develop the allowance for credit losses for any identified impaired loans. In developing the allowance for credit losses, the trusts
consider, among other things, the following credit quality indicators:
•
business characteristics and financial conditions of obligors;
•
current economic conditions and trends;
•
actual charge-off experience;
•
current delinquency levels;
•
value of underlying collateral and guarantees;
•
regulatory environment; and
•
any other relevant factors predicting investment recovery.
There were no such impairments during the years ended December 31, 2021 and 2020.
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7.
PERPETUAL CARE TRUSTS
At December 31, 2021 and 2020 the Company’s perpetual care trusts consisted of investments in debt and equity marketable securities and cash equivalents,
both directly as well as through mutual and investment funds. All of these investments are carried at fair value. All of the investments subject to the fair value
hierarchy are considered either Level 1 or Level 2 assets pursuant to the three-level hierarchy described in Note 16 Fair Value. There were no Level 3 assets in
the Company’s perpetual care trusts. The perpetual care trusts are VIEs for which the Company is the primary beneficiary.
A reconciliation of the Company’s perpetual care trust activities for the year ended December 31, 2021 and 2020 is presented below (in thousands):
Year ended December 31,
2021
2020
Balance—beginning of period
$
316,746
$
346,089
Contributions
9,233
8,500
Distributions
(45,395 )
(48,820 )
Interest and dividends
36,003
24,746
Capital gain distributions
6,362
844
Realized gains and losses, net
16,611
(301 )
Other than temporary impairment
(55 )
(14,710 )
Taxes
(1,202 )
(616 )
Fees
(2,959 )
(3,161 )
Unrealized change in fair value
3,794
4,175
Total
339,138
316,746
Less: Assets held for sale
—
(4,518 )
Balance—end of period
$
339,138
$
312,228
During the years ended December 31, 2021 and 2020, purchases of available for sale securities were approximately $30.2 million and $16.1 million,
respectively. During the years ended December 31, 2021 and 2020, sales, maturities and paydowns of available for sale securities were approximately $12.5
million and $42.1 million, respectively. Cash flows from perpetual care trust related contracts are presented as operating cash flows in the Company’s
consolidated statements of cash flows.
The cost and market value associated with the assets held in the perpetual care trusts as of December 31, 2021 and 2020 were as follows (in thousands):
December 31, 2021
Fair Value
Hierarchy
Level
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Short-term investments
1
$
25,674 $
— $
— $
25,674
Fixed maturities:
U.S. governmental securities
2
12
2
—
14
Corporate debt securities
2
—
—
—
—
Other debt securities
2
—
—
—
—
Total fixed maturities
12
2
—
14
Mutual funds—debt securities
1
2,306
28
(35 )
2,299
Mutual funds—equity securities
1
3,894
1,341
(63 )
5,172
Other investment funds
285,826
14,554
(2,776 )
297,604
Equity securities
1
6,817
1,661
(113 )
8,365
Other invested assets
2
9
1
—
10
Total investments
$
324,538 $
17,587 $
(2,987 ) $
339,138
Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value
hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the
Company’s consolidated balance sheet. This asset class is includes fixed income funds and equity funds, which have a redemption period ranging from 1 to
30 days, and private credit funds, which have lockup periods ranging from zero to fifteen years with four potential one year extensions at the discretion of
the funds’ general partners. As of December 31, 2021 there were $67.3 million in unfunded investment commitments to the private credit funds, which are
callable at any time. This asset class also includes $79.7 million of direct loans which are accounted for at amortized cost, net of unamortized origination
fees, if any, and are categorized as Level 3 investments in
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the fair value hierarchy. The interest rates on these direct loans are consistent with market rates, and their amortized cost approximates fair value.
December 31, 2020
Fair Value
Hierarchy
Level
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Short-term investments
1
$
21,217 $
— $
— $
21,217
Fixed maturities:
U.S. governmental securities
2
48
4
—
52
Corporate debt securities
2
505
92
(44 )
553
Other debt securities
2
433
—
(28 )
405
Total fixed maturities
986
96
(72 )
1,010
Mutual funds—debt securities
1
2,386
62
(9 )
2,439
Mutual funds—equity securities
1
9,240
1,244
(7 )
10,477
Other investment funds
247,845
21,952
(10,813 )
258,984
Equity securities
1
21,748
873
(19 )
22,602
Other invested assets
2
16
1
—
17
Total investments
$
303,438 $
24,228 $
(10,920 ) $
316,746
Less: Assets held for sale
(4,518 )
Total
$
303,438 $
24,228 $
(10,920 ) $
312,228
Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value
hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the
Company’s consolidated balance sheet. This asset class is composed of fixed income funds and equity funds, which have a redemption period ranging from
1 to 30 days, and private credit funds, which have lockup periods ranging from zero to six years with three potential one year extensions at the discretion of
the funds’ general partners. As of December 31, 2020 there were $41.1 million in unfunded investment commitments to the private credit funds, which are
callable at any time.
The contractual maturities of debt securities as of December 31, 2021 and 2020, were as follows (in thousands):
December 31, 2021
Less than
1 year
1 year through
5 years
6 years through
10 years
More than
10 years
U.S. governmental securities
$
— $
1 $
— $
13
Corporate debt securities
—
—
—
—
Other debt securities
—
—
—
—
Total fixed maturities
$
— $
1 $
— $
13
December 31, 2020
Less than
1 year
1 year through
5 years
6 years through
10 years
More than
10 years
U.S. governmental securities
$
25 $
6 $
— $
21
Corporate debt securities
—
553
—
—
Other debt securities
405
—
—
—
Total fixed maturities
$
430 $
559 $
— $
21
Temporary Declines in Fair Value
The Company evaluates declines in fair value below cost of each individual asset held in the perpetual care trusts on a quarterly basis.
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An aging of unrealized losses on the Company’s investments in debt and equity securities within the perpetual care trusts as of December 31, 2021 and 2020 is
presented below (in thousands):
Less than 12 months
12 months or more
Total
December 31, 2021
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fixed maturities:
U.S. governmental securities
$
— $
— $
990 $
— $
990 $
—
Corporate debt securities
—
—
1,959
—
1,959
—
Other debt securities
—
—
—
—
—
—
Total fixed maturities
—
—
2,949
—
2,949
—
Mutual funds—debt securities
863
25
454
10
1,317
35
Mutual funds—equity securities
661
60
1
3
662
63
Other investment funds
26,533
2,776
—
—
26,533
2,776
Equity securities
962
112
1
1
963
113
Total
$
29,019 $
2,973 $
3,405 $
14 $
32,424 $
2,987
Less than 12 months
12 months or more
Total
December 31, 2020
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fixed maturities:
U.S. governmental securities
$
— $
— $
990 $
— $
990 $
—
Corporate debt securities
—
—
1,959
44
1,959
44
Other debt securities
405
28
—
—
405
28
Total fixed maturities
405
28
2,949
44
3,354
72
Mutual funds—debt securities
600
9
—
—
600
9
Mutual funds—equity securities
288
7
—
—
288
7
Other investment funds
74,885
10,813
—
—
74,885
10,813
Equity securities
45
4
19
15
64
19
Total
$
76,223 $
10,861 $
2,968 $
59 $
79,191 $
10,920
For all securities in an unrealized loss position, the Company evaluated the severity of the impairment and length of time that a security has been in a loss
position and concluded the decline in fair value below the asset’s cost was temporary in nature. In addition, the Company is not aware of any circumstances that
would prevent the future market value recovery for these securities.
Other-Than-Temporary Impairment of Trust Assets
The Company assesses its perpetual care trust assets for other-than-temporary declines in fair value on a quarterly basis. During the year ended December 31,
2021, the Company determined that there were 6 securities with an aggregate cost basis of approximately $84,000 and an aggregate fair value of approximately
$30,000, resulting in an impairment of $54,000, with such impairment considered to be other-than-temporary. During the year ended December 31, 2020, the
Company determined that there were 49 securities with an aggregate cost basis of approximately $63.6 million and an aggregate fair value of approximately
$48.9 million, resulting in an impairment of $14.7 million, with such impairment considered to be other-than-temporary. Accordingly, the Company adjusted the
cost basis of these assets to their current value with the offset going against the liability for perpetual care trust corpus in its consolidated balance sheet.
Impairment of Direct Loans
On a quarterly basis, the perpetual care trusts evaluate the carrying value of each direct loan for impairment. A direct loan is considered impaired when, based on
current information and events, it is determined that the trusts will not be able to collect the amounts due according to the loan contract, including scheduled
interest payments. This evaluation is generally based on delinquency information, an assessment of the borrower’s financial condition and the adequacy of
collateral, if any. The trusts would generally place direct loans on nonaccrual status when the full and timely collection of interest or principal becomes uncertain
and they are 90 days past due for interest or principal, unless the direct loan is both well-secured and in the process of collection. When placed on nonaccrual,
the trusts would reverse any accrued unpaid interest receivable against interest income and amortization of any net deferred fees is suspended. Generally, the
trusts would return a direct loan to accrual status when all delinquent interest and principal become current under the terms of the credit agreement and
collectability of remaining principal and interest is no longer doubtful. In certain circumstances, the trusts may place a direct loan on nonaccrual status but
conclude
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it is not impaired. The trusts may retain independent third-party valuations on such nonaccrual positions to support impairment decisions.
When the trusts identify a direct loan as impaired, they measure the impairment based on the present value of expected future cash flows, discounted at the
receivable’s effective interest rate, or the estimated fair value of the collateral, less estimated costs to sell. If it is determined that the value of an impaired
receivable is less than the recorded investment, the trusts would recognize impairment with a charge to deferred revenue. When the value of the impaired loan is
calculated by discounting expected cash flows, interest income would be recognized using the loan’s effective interest rate over the remaining life of the loan.
The trusts individually develop the allowance for credit losses for any identified impaired loans. In developing the allowance for credit losses, the trusts
consider, among other things, the following credit quality indicators:
•
business characteristics and financial conditions of obligors;
•
current economic conditions and trends;
•
actual charge-off experience;
•
current delinquency levels;
•
value of underlying collateral and guarantees;
•
regulatory environment; and
•
any other relevant factors predicting investment recovery.
There were no such impairments during the years ended December 31, 2021 and 2020.
8.
INTANGIBLE ASSETS
The Company has intangible assets with finite lives recognized in connection with acquisitions and long-term lease, management and operating agreements. The
Company amortizes these intangible assets over their estimated useful lives.
The following table reflects the components of intangible assets at December 31, 2021 and 2020 (in thousands):
December 31, 2021
December 31, 2020
Gross
Carrying
Amount
Accumulated
Amortization
Net
Intangible
Assets
Gross
Carrying
Amount
Accumulated
Amortization
Net
Intangible
Assets
Lease and management agreements
$
59,758 $
(7,553 ) $
52,205 $
59,758 $
(6,557 ) $
53,201
Underlying contract value
2,593
(810 )
1,783
2,593
(745 )
1,848
Non-compete agreements
406
(406 )
—
406
(406 )
—
Other intangible assets
259
(224 )
35
259
(214 )
45
Total intangible assets
$
63,016 $
(8,993 ) $
54,023 $
63,016 $
(7,922 ) $
55,094
Amortization expense for intangible assets was $1.1 million and $1.2 million for the years ended December 31, 2021 and 2020, respectively. The following table
presents estimated amortization expense related to intangible assets with finite lives for each of the next five years (in thousands):
2022
$
1,071
2023
$
1,071
2024
$
1,071
2025
$
1,065
2026
$
1,061
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9.
LONG-TERM DEBT
Total debt consisted of the following as of December 31, 2021 and 2020 (in thousands):
December 31, 2021
December 31, 2020
8.500% Senior Secured Notes due 2029
$
400,000
$
—
9.875%/11.500% Senior Secured PIK Toggle Notes, due June 2024
—
335,328
Insurance and vehicle financing
762
361
Less deferred financing costs, net of accumulated amortization
(10,599 )
(14,657 )
Total debt
390,163
321,032
Less current maturities
(762 )
(317 )
Total long-term debt
$
389,401
$
320,715
2029 Notes
On May 11, 2021, the Company issued $400.0 million aggregate principal amount of 8.500% Senior Secured Notes due 2029. The gross proceeds from the sale
of the 2029 Notes was $389.9 million, less advisor fees, legal fees, mortgage costs and other closing expenses. The 2029 Notes were issued pursuant to the 2029
Indenture, dated as of May 11, 2021, by and among the Company, the guarantors named therein and Wilmington Trust, National Association, as trustee and
collateral agent (“Wilmington”). Capitalized terms that are used in this description of the 2029 Notes but not defined herein shall have the meaning assigned to
such terms in the 2029 Indenture.
Proceeds from the sale of the 2029 Notes were used to fund the redemption in full of approximately $338.1 million aggregate principal amount of the 2024
Notes together with an approximately $18.5 million prepayment premium and pay fees and expenses incurred in connection with the offering. Any remaining
proceeds will be used for general corporate purposes, which may include acquisitions. Upon deposit of the funds to redeem the 2024 Notes with the 2024
Trustee, the 2024 Indenture was satisfied and discharged in accordance with its terms. As a result of the satisfaction and discharge of the 2024 Indenture, the
2024 Issuers and the 2024 Guarantors, including the Company, have been released from their obligations with respect to the 2024 Indenture and the 2024 Notes,
except with respect to those provisions of the 2024 Indenture that, by their terms, survive the satisfaction and discharge of the 2024 Indenture.
Interest; Maturity; Issue Price
Interest on the 2029 Notes accrues at a rate of 8.5% per year, payable in cash semiannually, in arrears, on May 15 and November 15 of each year, beginning on
November 15, 2021. The Notes mature on May 15, 2029. Subject to the covenants contained in the 2029 Indenture, the Company may, without the consent of
the holders of the 2029 Notes, issue additional notes under the 2029 Indenture (“Additional Notes”) having the same terms in all respects as the 2029 Notes,
which shall be treated with the 2029 Notes as a single class under the 2029 Indenture. The issue price of the 2029 Notes was 100%.
Redemption
The 2029 Notes are redeemable at the Company’s option, in whole or in part, on and after May 15, 2024 at the redemption prices (expressed as percentages of
principal amount) set forth below, plus any accrued and unpaid interest, if any, to, but excluding, the redemption date.
On or after May 15, 2024 and prior to May 15, 2025
104.250%
On or after May 15, 2025 and prior to May 15, 2026
102.125%
On or after May 15, 2026
100.000%
In addition, prior to May 15, 2024, the Company may utilize the net proceeds of one or more equity offerings to redeem up to 40% of the aggregate principal
amount of the 2029 Notes originally issued under the 2029 Indenture, including any Additional Notes, at a redemption price of 108.500% of the principal
amount of the 2029 Notes redeemed, plus any accrued and unpaid interest, if any, to, but excluding, the redemption date, provided that at least 50% of the
aggregate principal amount of the 2029 Notes (including Additional Notes) originally issued under the 2029 Indenture remain outstanding following such
redemption.
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During each of the 12-month periods ending May 10, 2022, May 10, 2023 and May 10, 2024, respectively, the Company may redeem up to 10% of the
aggregate principal amount of the 2029 Notes (including Additional Notes) originally issued under the 2029 Indenture at a redemption price equal to 103% of
the principal amount of the 2029 Notes redeemed plus accrued and unpaid interest, if any, to, but excluding, the redemption date.
Prior to May 15, 2024, the 2029 Notes are redeemable at the Company’s option, in whole or in part, at a redemption price equal to 100% of the principal amount
of the 2029 Notes being redeemed plus an “applicable premium” (as defined in the 2029 Indenture) along with accrued and unpaid interest, if any, to, but
excluding, the redemption date.
Upon the occurrence of a “change of control” (as defined in the 2029 Indenture), if the Company has not previously exercised its right to redeem all of the
outstanding 2029 Notes pursuant to the optional redemption provisions as described above, the Company must offer to repurchase the 2029 Notes at a
redemption price equal to 101% of the principal amount of the 2029 Notes, plus accrued and unpaid interest, if any, to, but excluding, the date of repurchase.
Upon certain asset sales where the excess proceeds from all applicable asset sales exceed $10 million since the issue date of the 2029 Notes, the Company may
be required in certain circumstances to make an offer to purchase 2029 Notes with the excess proceeds from such an asset sale in excess of such $10 million
threshold at a price in cash equal to 100% of the principal amount thereof, together with accrued and unpaid interest, if any, to, but excluding, the date of
purchase.
Guarantees and Collateral
The Company’s obligations under the 2029 Notes and the 2029 Indenture are jointly and severally guaranteed (the “Note Guarantees”) by each of the
Company’s existing and future direct and indirect domestic subsidiaries, with certain exceptions, and will be guaranteed by each of the Company’s foreign
subsidiaries that guarantees any future credit facility (each applicable foreign and domestic subsidiary, a “2029 Guarantor” and collectively, the “2029
Guarantors”). In connection with the Note Guarantees, the Company, the 2029 Guarantors and Wilmington entered into a Security Agreement, dated May 11,
2021 (the “Security Agreement”). Pursuant to the 2029 Indenture and the Security Agreement, the Company’s obligations under the 2029 Indenture and the
2029 Notes are secured by a lien and security interest (subject to permitted liens and security interests) in substantially all of the Company’s and the 2029
Guarantors’ existing and future property and assets, excluding certain assets which include, among others: (a) trust and other fiduciary accounts and amounts
required to be deposited or held therein, (b) assets that may not be pledged as a matter of law or without governmental approvals, until such time such assets
may be pledged without legal prohibition and (c) owned and leased real property that (i) may not be pledged as a matter of law or without the prior approval of
any governmental authority or third person, (ii) is not operated or intended to be operated as a cemetery, crematory or funeral home or (iii) has a fair market
value of less than $3.0 million.
The 2029 Notes are the Company’s senior secured obligations and the guarantees are the 2029 Guarantors’ senior secured obligations. The obligations of the
Company and each 2029 Guarantor will:
•
rank equal in right of payment with all of the Company and each 2029 Guarantor’s existing and future senior indebtedness, including any
borrowings under any future credit facility;
•
rank senior in right of payment to all of the Company’s and each 2029 Guarantor’s existing and future subordinated indebtedness;
•
be effectively senior to all of the Company’s and each 2029 Guarantor’s unsecured senior indebtedness to the extent of the value of the collateral
securing the 2029 Notes and the Note Guarantees;
•
be contractually subordinated to the Company’s and each 2029 Guarantor’s obligations under any future credit facility permitted by the 2029
Indenture to the extent of the value of the collateral securing such credit facility and subject to the terms of any future intercreditor agreement; and
•
structurally subordinated to all indebtedness and other obligations of the Company’s existing and future subsidiaries that do not guarantee the
2029 Notes.
Covenants
The 2029 Indenture requires the Company and the 2029 Guarantors, as applicable, to comply with various affirmative covenants regarding, among other
matters, delivery to Wilmington of financial statements and certain other information or reports filed with the Securities and Exchange Commission.
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The 2029 Indenture requires the Company and the 2029 Guarantors, as applicable, to comply with certain covenants including, but not limited to, covenants
that, subject to certain exceptions, limit the Company’s and 2029 Guarantors’ ability to: (i) incur additional indebtedness or issue disqualified capital stock; (ii)
pay dividends, redeem subordinated debt or make other restricted payments; (iii) make certain investments; (iv) create or incur certain liens; (v) issue stock of
subsidiaries; (vi) enter into certain transactions with affiliates; (vii) merge, consolidate or transfer substantially all of its respective assets; (viii) agree to dividend
or other payment restrictions affecting the Restricted Subsidiaries; (ix) change the business it conducts; (x) withdraw any monies or other assets from, or make
any investments of, its trust funds; and (xi) transfer or sell assets, including capital stock of a Restricted Subsidiary.
Events of Default
The 2029 Indenture contains customary events of default, which could, subject to certain conditions, cause the 2029 Notes to become immediately due and
payable, including, but not limited to defaults by the Company in the payment of the principal of any 2029 Notes when the same becomes due and payable at
maturity, upon acceleration or redemption, or otherwise (other than pursuant to an offer to purchase by the Company) or in the payment of interest on any 2029
Notes when the same becomes due and payable, and the default continues for a period of 30 days; failure to comply with certain repurchase obligations in the
2029 Indenture and certain other covenants the 2029 Indenture relating to mergers, consolidation or sales of assets; failure to comply with certain other
covenants in the 2029 Indenture beyond the applicable cure period following notice by Wilmington or the holders of at least 30% in aggregate principal amount
of the 2029 Notes then outstanding; failure to pay debt within any applicable grace period after the final maturity or acceleration of such debt by the holders
thereof because of a default, if the total amount of such debt unpaid or accelerated exceeds $20.0 million; failure to pay final judgments entered by a court or
courts of competent jurisdiction aggregating $20.0 million or more (excluding amounts covered by insurance), which judgments are not paid, discharged or
stayed, for a period of 60 days; and certain events of bankruptcy or insolvency.
As of December 31, 2021, the Company was in compliance with the covenants of the 2029 Indenture, including after taking into consideration the transactions
described in Note 17 Related Parties.
Deferred Financing Costs
In connection with the full redemption of the 2024 Notes, the Company wrote off unamortized deferred financing fees of $13.1 million and original issue
discount of $8.5 million, which are included in Loss on debt extinguishment in the accompanying consolidated statements of operations for the year ended
December 31, 2021.
The Company incurred debt issuance costs and fees of $11.5 million for the year ended December 31, 2021, in connection with the issuance of the 2029 Notes,
which have been deferred and are being amortized over the life of the 2029 Notes, using the effective interest method. For the years ended December 31, 2021
and 2020, the Company recognized $2.4 million and $3.9 million, respectively, of amortization of deferred financing fees on its various debt facilities.
10.
STOCKHOLDERS’ EQUITY
The Company is authorized to issue two classes of capital stock: common stock, $0.01 par value per share (“Common Stock”) and preferred stock, $0.01 par
value per share (“Preferred Stock”). At December 31, 2021, 118,290,600 shares of Common Stock were issued and outstanding and no shares of Preferred Stock
were issued or outstanding. At December 31, 2021, there were 81,709,400 shares of Common Stock available for issuance, including 830,512 shares available
for issuance as stock-based incentive compensation under the StoneMor Amended and Restated 2019 Long-Term Incentive Plan, as amended (the “2019 Plan”),
and 10,000,000 shares of Preferred Stock available for issuance.
Holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the Company’s stockholders, will have the
exclusive right to vote for the election of directors and do not have cumulative voting rights. In the event of any liquidation, dissolution or winding-up of the
Company’s affairs, the holders of the Company’s Common Stock will be entitled to share ratably in the Company’s assets that are remaining after payment or
provision for payment of all of the Company’s debts and obligations and after liquidation payments to and subject to any continuing participation by holders of
outstanding shares of Preferred Stock, if any.
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The Board is authorized, subject to any limitations prescribed by law, without further stockholder approval, to establish and to issue from time to time one or
more classes or series of Preferred Stock covering up to an aggregate of 10,000,000 shares of Preferred Stock. Each class or series of Preferred Stock will cover
the number of shares and will have the powers, preferences, rights, qualifications, limitations and restrictions determined by the Board, which may include,
among others, dividend rights, liquidation preferences, voting rights, conversion rights, preemptive rights and redemption rights. Except as provided by law or in
a preferred stock designation, the holders of Preferred Stock will not be entitled to vote at or receive notice of any meeting of stockholders.
11.
LONG-TERM INCENTIVE PLAN
The 2019 Plan, which was approved by the Company’s stockholders at the 2020 Annual Meeting of Stockholders, permits the granting of awards covering a
total of 9,875,000 common units of the Company. A “unit” under the 2019 Plan is defined as a common unit of the Company and such other securities as may be
substituted or resubstituted for common units of the Company, including but not limited to shares of the Company’s Common Stock. The 2019 Plan is intended
to promote the interests of the Company by providing to employees, consultants and directors of the Company incentive compensation awards to encourage
superior performance and enhance the Company’s ability to attract and retain the services of individuals who are essential for its growth and profitability and to
encourage them to devote their best efforts to advancing the Company’s business.
Stock Options
At December 31, 2021 and 2020, there were 6,075,000 stock options outstanding with a weighted-average exercise price of $1.27 per share, all of which were
expected to vest. The Company did not grant any stock options and no options were exercised, forfeited or expired during the year ended December 31, 2021.
The option awards vest in three equal annual installments on the anniversary of the grant date (or first business day thereafter), provided that the recipient
remains employed by the Company. The Company measured the grant-date fair values of the options utilizing the Black-Scholes model and recognizes stock-
based compensation expense on a straight-line basis over the weighted-average service period, which is expected to be three years. The option awards expire no
later than 10 years from the date of grant.
At December 31, 2021, there were 3,783,325 stock options exercisable with a weighted-average exercise price of $1.24 per share. At December 31, 2021, the
aggregate intrinsic value of total options outstanding and expected to vest was $6.2 million and the weighted-average remaining contractual term was 8.1 years.
The aggregate intrinsic value of options exercisable at December 31, 2021 was $3.9 million. The total fair value of options vested during the year ended
December 31, 2021 was $0.7 million.
For the years ended December 31, 2021 and 2020, non-cash compensation expense related to stock options was $0.7 million and $0.6 million, respectively. As
of December 31, 2021, total unrecognized compensation cost related to unvested stock options was $0.8 million, which the Company expects to recognize over
the remaining weighted-average period of 1.3 years.
Assumptions used in calculating the fair value of stock options granted are summarized below:
2020
Valuation assumptions:
Risk-free interest rate
0.50 %
Expected volatility
31.15 %
Expected term (years)
6.0
Exercise price per stock option
$
1.71
Expected dividend yield
None
Restricted Stock and Restricted Phantom Stock
On December 3, 2020, the Compensation Committee approved the granting of 800,000 shares of restricted common stock to employees of the Company,
including certain members of senior management. The restricted stock awards vest in three equal annual installments on the anniversary of the grant date (or
first business day thereafter), provided that the recipient remains employed by the Company.
Restricted phantom stock awards represent contingent rights to receive a common share or an amount of cash, or a combination of both, based upon the value of
a common share. Phantom shares become payable, in cash or common stock, at the Company’s election, upon the separation of the holder from service or upon
the occurrence of certain other events specified in the 2019 Plan
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or the underlying agreements. During the year ended December 31, 2021, the Company granted 49,852 restricted phantom shares to directors.
A rollforward of restricted stock and phantom stock awards as of December 31, 2021 is as follows:
Number of Restricted Stock and
Phantom Stock Awards
Weighted Average Grant Date Fair Value
($)
Total non-vested at December 31, 2020
1,277,907
2.17
Granted
49,852
2.41
Vested
(454,159 )
2.61
Forfeited
—
—
Total non-vested at December 31, 2021
873,600
1.95
For the years ended December 31, 2021 and 2020, the Company recognized $1.3 million and $0.8 million, respectively, of non-cash compensation expense
related to restricted stock and phantom stock awards into earnings. As of December 31, 2021, total unamortized compensation cost related to unvested restricted
stock awards was $1.2 million, which the Company expects to recognize over the remaining weighted-average period of 1.5 years.
12.
INCOME TAXES
Income tax benefit from continuing operations for the years ended December 31, 2021 and 2020 consisted of the following (in thousands):
Years Ended December 31,
2021
2020
Current provision:
State
$
(65 )
$
(60 )
Federal
—
—
Foreign
(343 )
25
Total
(408 )
(35 )
Deferred provision:
State
3,147
(62 )
Federal
15,482
4,856
Foreign
149
96
Total
18,778
4,890
Total income tax benefit
$
18,370
$
4,855
A reconciliation of the federal statutory tax rate to the Company’s effective tax rate is as follows:
Years Ended December 31,
2021
2020
U.S. statutory income tax rate
21.0 %
21.0 %
State and local taxes, net of federal income tax benefit
3.0 %
0.1 %
Tax exempt (income) loss
0.1 %
(2.1 )%
Valuation allowance
0.8 %
7.0 %
Divestiture impact on valuation allowance
— %
(14.4 )%
Permanent differences
(0.5 )%
(0.1 )%
Effective tax rate
24.4 %
11.5 %
During 2020, the Company received a benefit for federal purposes associated with filing a consolidated return which allows income and losses to be offset
among the members of the affiliated group. During 2021, the effective tax rate increased due to net operating losses and benefits from deferred tax assets
associated with recognizing revenue more rapidly for tax purposes than for financial statement purposes. The primary deferred liabilities in both 2020 and 2021
will reverse over the lives of the various cemeteries, which range from an average 100 to 300 years.
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The components of the Company’s deferred tax assets and liabilities were as follows (in thousands):
December 31,
2021
2020
Deferred tax assets:
Prepaid expenses
$
10,619
$
15,780
State net operating loss
33,809
26,015
Federal net operating loss
100,093
86,651
Foreign net operating loss
4,604
9,171
Other
17
51
Valuation allowance
(101,447 )
(101,629 )
Total deferred tax assets
47,695
36,039
Deferred tax liabilities:
Property, plant and equipment
31,423
30,880
Deferred revenue related to future revenues and accounts receivable
21,725
29,480
Deferred revenue related to cemetery property
5,404
5,322
Total deferred tax liabilities
58,552
65,682
Net deferred tax liabilities
$
10,857
$
29,643
Net deferred tax assets and liabilities were classified on the consolidated balance sheets as follows (in thousands):
December 31,
2021
2020
Deferred tax assets
$
21
$
9
Noncurrent assets
21
9
Deferred tax assets
47,674
36,030
Deferred tax liabilities
58,552
65,682
Noncurrent liabilities
10,878
29,652
Net deferred tax liabilities
$
10,857
$
29,643
At December 31, 2021, the Company had available approximately $17,000 of alternative minimum tax credit carryforwards and approximately $477.0 million
and $618.0 million of federal and state net operating loss (“NOL”) carryforwards, respectively, a portion of which expires annually.
Management periodically evaluates all evidence both positive and negative in determining whether a valuation allowance to reduce the carrying value of
deferred tax assets is required. The vast majority of the Company’s taxable subsidiaries continue to accumulate deferred tax assets that on a more likely than not
basis will not be realized. A full valuation allowance continues to be maintained on these taxable subsidiaries. Along with other previous transfers of the
Company’s interests, the Company believes the Recapitalization Transactions in June 2019 caused a “change of control” for income tax purposes, which
significantly limits the Company’s ability to use NOLs and certain other tax assets to offset future taxable income.
At December 31, 2021, based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax
assets are deductible, management believed it was more likely than not that the Company will realize the benefits of these deductible differences. The amount of
deferred tax assets considered realizable could be reduced in the future if estimates of future taxable income during the carryforward period are reduced.
In accordance with applicable accounting standards, the Company recognizes only the impact of income tax positions that, based upon their merits, are more
likely than not to be sustained upon audit by a taxing authority. To evaluate its current tax positions in order to identify any material uncertain tax positions, the
Company developed a policy of identifying and evaluating uncertain tax positions that considers support for each tax position, industry standards, tax return
disclosures and schedules and the significance of each position. It is the Company’s policy to recognize interest and penalties, if any, related to unrecognized tax
benefits in income tax expense in the consolidated statements of operations. At December 31, 2021 and 2020, the Company had no material uncertain tax
positions.
The Company is not currently under tax examination by any federal jurisdictions or state income tax jurisdictions. In general, the federal statute of limitations
and certain state statutes of limitations are open from 2016 forward. For entities with net operating loss carryovers the statute of limitations is extended to 2013
to the extent of the net operating loss carryover.
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13.
DEFERRED REVENUES AND COSTS
The Company defers revenues and all direct costs associated with the sale of pre-need cemetery merchandise and services until the merchandise is delivered or
the services are performed. The Company recognizes deferred merchandise and service revenues as customer contract liabilities within long-term liabilities on
its consolidated balance sheets. The Company recognizes deferred direct costs associated with pre-need cemetery merchandise and service revenues as deferred
selling and obtaining costs within long-term assets on its consolidated balance sheets. The Company also defers the costs to obtain new pre-need cemetery and
new prearranged funeral business as well as the investment earnings on the prearranged services and merchandise trusts. Such costs are recognized when the
associated performance obligation is fulfilled based upon the net change in the customer contract liabilities. All other selling costs are expensed as incurred.
Additionally, the Company has elected the practical expedient to expense incremental costs to obtain a contract as incurred, as the associated amortization period
is typically one year or less.
Deferred revenues and related costs consisted of the following (in thousands):
December 31, 2021
December 31, 2020
Deferred contract revenues
$
880,290
$
832,373
Deferred merchandise trust revenue
150,368
87,218
Deferred merchandise trust unrealized gains (losses)
25,602
29,573
Deferred revenues
$
1,056,260
$
949,164
Deferred selling and obtaining costs
$
124,023
$
116,900
For the years ended December 31, 2021 and 2020, the Company recognized $67.5 million and $60.1 million, respectively, of the customer contract liabilities
balance that existed at December 31, 2020 and 2019, respectively, as revenue.
The components of the customer contract liabilities, net in the Company’s consolidated balance sheets at December 31, 2021 and December 31, 2020 were as
follows (in thousands):
December 31, 2021
December 31, 2020
Customer contract liabilities, gross
$
1,082,970
$
973,444
Amounts due from customers for unfulfilled performance obligations on
cancellable pre-need contracts
(26,710 )
(24,280 )
Customer contract liabilities, net
$
1,056,260
$
949,164
The Company expects to service approximately 55% of its deferred revenue that existed at December 31, 2021 and 2020 in the first 4-5 years and approximately
80% of its deferred revenue that existed at December 31, 2021 and 2020 within 18 years. The Company cannot estimate the period when it expects its remaining
performance obligations will be recognized, because certain performance obligations will only be satisfied at the time of death.
14.
COMMITMENTS AND CONTINGENCIES
Legal
The Company is subject to state law claims that certain of its officers and directors breached their fiduciary duties, as well as a claim under federal law that
certain of the Company’s prior proxy disclosures were misleading. The Company could also become subject to additional claims and legal proceedings relating
to the factual allegations made in these actions. While management cannot reasonably estimate the potential exposure in these matters at this time, if we do not
prevail in any such proceedings, we could be required to pay substantial damages or settlement costs, subject to certain insurance coverages. Management has
determined that, based on the status of the claims and legal proceedings described below, the amount of the potential losses cannot be reasonably estimated at
this time. These actions are summarized below.
•
Bunim v. Miller, et al., No. 2:17-cv-519-ER, pending in the United States District Court for the Eastern District of Pennsylvania, and filed on
February 6, 2017. The plaintiff in this case brought, derivatively on behalf of the Partnership, claims that the officers and directors of StoneMor GP
LLC, a Delaware limited liability company, (“StoneMor GP”) aided and abetted in breaches of StoneMor GP’s purported fiduciary duties by, among
other things and in general, allegedly making misrepresentations through the use of non-GAAP accounting standards in the Partnership’s public
filings, by allegedly failing to clearly disclose the use of proceeds from debt and equity offerings, and by allegedly approving unsustainable
distributions. The plaintiff also claims that these actions and misrepresentations give rise to
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causes of action for gross mismanagement, unjust enrichment, and (in connection with a purportedly misleading proxy statement filed in 2014)
violations of Section 14(a) of the Exchange Act. The derivative plaintiff seeks an award of damages, attorneys’ fees and costs in favor of the
Partnership as nominal plaintiff, as well as general compliance and governance changes. This case has been stayed, by the agreement of the parties,
provided that either party may terminate the stay on 30 days’ notice.
•
Fried v. Axelrod, et al., C.A. No. 2020-1065-SG, pending in the Chancery Court of the State of Delaware and filed on December 16, 2020. The
plaintiff in this case brought an action he seeks to have certified as a class action that asserts claims against Axar, Andrew M. Axelrod and the other
individuals who were directors at the time of the transactions in question and against the Company as a nominal defendant. The complaint includes
direct claims against all individual defendants and derivative claims against the individual defendants other than Mr. Axelrod for breach of fiduciary
duty in approving certain transactions in connection with the Company’s sale of preferred and common stock to Axar and certain accounts managed
by Axar (the “Axar Stock Purchase”). The complaint also includes derivative claims against Axar for breach of fiduciary duty and unjust enrichment
in connection with those same transactions as well as direct claims against both Axar and Mr. Axelrod for breach of fiduciary duty with respect to
those transactions. Finally, the complaint includes a derivative claim against all individual defendants for breach of fiduciary duty in connection with
the approval of a related-party investment disclosed by the Company. The plaintiff seeks rescission of the transactions contemplated by the Axar
Stock Purchase and the related-party investment and/or an award of damages as well as attorneys’ fees and costs. On January 6, 2021, a motion to
dismiss the complaint was filed on behalf of the Company and the individual defendants other than Mr. Axelrod and on January 11, 2021, a motion to
dismiss the complaint was filed on behalf of Axar and Mr. Axelrod. On April 2, 2021, the plaintiff filed a First Amended Complaint, which included
additional factual background regarding the plaintiff’s claims and alleged demand futility, but did not add additional defendants, claims or relief
sought. The defendants filed a motion to dismiss the First Amended Complaint on April 16, 2021. Thereafter, the plaintiff and defendants filed a joint
stipulation to stay the Fried litigation. On December 9, 2021, this action was consolidated with the Titterton action filed in November 2021 and
described below.
•
Titterton v. StoneMor Inc., C.A. No.: 2021-0259-PAF, pending in the Court of Chancery of the State of Delaware and filed on March 25, 2021. The
plaintiff in this case brought an action seeking expedited relief under Section 220 of the Delaware General Corporation Law. The plaintiff had
previously made a demand for inspection of certain books and records of the Company allegedly related to potential corporate misconduct. The
Company responded to the request by rejecting plaintiff’s demand as deficient under Delaware law for failure to state a proper purpose and being
overbroad, but nonetheless provided certain of the requested materials. After the plaintiff made a further demand for inspection in March 2021, the
Company again rejected the demand as deficient under Delaware law for failure to state a proper purpose and being overbroad. The plaintiff then
brought this action seeking an order to compel additional books and records and reimbursement of attorney’s fees. On April 19, 2021, the Company
filed its answer to the complaint. Trial was held on July 21, 2021, after which the Court issued an order permitting the requested inspection, in part,
but denied the plaintiff’s request for attorneys’ fees. The Company has produced the requested materials and on November 23, 2021, the parties
stipulated to dismissal of this action.
•
Titterton v. StoneMor Inc., C.A. No.: 2021-1028-SG, pending in the Court of Chancery of the State of Delaware and filed on November 24, 2021.
The plaintiff in this case brought a derivative action that asserts claims against Axar, Andrew M. Axelrod and the other individuals who were directors
at the time of the transactions in question and against the Company as a nominal defendant. On December 9, 2021, the Fried action was consolidated
with this action, with Titterton and Fried appointed as lead plaintiffs. On December 27, 2021, a motion to dismiss plaintiffs’ complaint was filed on
behalf of the Company and the individual defendants other than Mr. Axelrod and on December 28, 2021, a motion to dismiss the complaint was filed
on behalf of Axar and Mr. Axelrod. On February 4, 2022, all defendants filed their briefs in support of their motions to dismiss. The plaintiffs
subsequently filed an amended complaint on March 11, 2022. The amended complaint includes derivative claims against the individual defendants,
Mr. Axelrod, and Axar for breach of fiduciary duty in approving certain transactions in connection with the Company’s sale of preferred and common
stock to Axar and certain accounts managed by Axar (the “Axar Stock Purchase”), as well as for breach of fiduciary duty in connection with the
approval of a related-party investment disclosed by the Company. The amended complaint also includes claims against Mr. Axelrod and Axar for
unjust enrichment with respect to those same transactions. The plaintiffs seek rescission of the transactions contemplated by the Axar Stock Purchase
and the related-party investment and/or an award of damages as well as attorneys’ fees and costs. On March 25, 2022, the defendants filed motions to
dismiss the amended complaint.
The Company is party to other legal proceedings in the ordinary course of its business, but does not believe it is reasonably possible that the outcome of any
proceedings, individually or in the aggregate, will have a material adverse effect on its financial
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position, results of operations or cash flows. The Company carries insurance with coverage and coverage limits that it believes to be customary in the cemetery
and funeral home industry. Although there can be no assurance that such insurance will be sufficient to protect the Company against all contingencies,
Management believes that the insurance protection is reasonable in view of the nature and scope of the Company’s operations.
Moon Landscaping, Inc.
On April 2, 2020, the Company entered into two multi-year Master Services Agreements (the “MSAs”) with Moon Landscaping, Inc. and its affiliate, Rickert
Landscaping, Inc. (collectively “Moon”) to outsource grounds and maintenance services at most of the Company’s funeral homes and cemeteries. Due to certain
liquidity constraints and performance issues experienced by Moon, the Company exercised its right under the MSAs to take back the responsibility for grounds
and maintenance services at the locations outsourced to Moon with respect to 81 locations effective July 1, 2021, 22 locations effective August 1, 2021, 111
locations effective August 9, 2021, 34 locations effective November 15, 2021 and the remaining locations effective January 7, 2022.
Archdiocese of Philadelphia
In May 2014, the Company entered into lease and management agreements with the Archdiocese of Philadelphia, pursuant to which the Company has
committed to pay aggregate fixed rent of $36.0 million in the following amounts:
Lease Years 6-20 (June 1, 2019-May 31, 2034)
$1,000,000 per Lease Year
Lease Years 21-25 (June 1, 2034-May 31, 2039)
$1,200,000 per Lease Year
Lease Years 26-35 (June 1, 2039-May 31, 2049)
$1,500,000 per Lease Year
Lease Years 36-60 (June 1, 2049-May 31, 2074)
None
The fixed rent for lease years six through 11, an aggregate of $6.0 million, is deferred. If prior to May 31, 2025, the Archdiocese terminates the agreements in
accordance with their terms during lease year 11 or the Company terminates the agreements as a result of a default by the Archdiocese, the Company is entitled
to retain the deferred fixed rent. If the agreements are not terminated, the deferred fixed rent will become due and payable on or before June 30, 2025.
Defined Contribution Plan
The Company has a defined contribution plan under Section 401(k) of the Internal Revenue Code, (the “401k Plan”), for its U.S. employees. The Plan allows all
eligible employees to defer up to 75 percent of their income on a pretax basis through contributions to the 401k Plan, subject to limitations under Section 401(k)
of the Internal Revenue Code. Beginning in April 2021, the Company provides a matching contribution of 25 percent of the first three percent of an employee’s
contribution. The Company also has a similar type plan for its Puerto Rico employees. For the year ended December 31, 2021, the charge to operations for these
benefits was $0.5 million.
15.
LEASES
The Company leases a variety of assets throughout its organization, such as office space, funeral homes, warehouses and equipment. In addition the Company
has a sale-leaseback related to one of its warehouses. Leases with an initial term of 12 months or less are not recorded on the Company’s consolidated balance
sheets, and the Company recognizes lease expense for these leases on a straight-line basis over the lease term. For lease agreements with an initial term of more
than 12 months, the Company measures the lease liability at the present value of the sum of the remaining minimum rental payments, which exclude executory
costs.
Certain leases provide the Company with the option to renew for additional periods, with renewal terms that can extend the lease term for periods ranging from
1 to 30 years. The exercise of lease renewal options is at the Company’s sole discretion, and the Company is only including the renewal option in the lease term
when the Company can be reasonably certain that it will exercise the renewal options. The Company does have residual value guarantees on the finance leases
for its vehicles, but no residual guarantees on any of its operating leases.
Certain of the Company’s leases have variable payments with annual escalations based on the proportion by which the consumer price index (“CPI”) for all
urban consumers increased over the CPI index for the prior comparative year.
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The Company has the following balances recorded on its consolidated balance sheets related to leases (in thousands):
December 31, 2021
December 31, 2020
Assets:
Operating
$
5,944
$
5,171
Finance
3,343
4,296
Total ROU assets
$
9,287
$
9,467
Liabilities:
Current
Operating
$
1,103
$
1,182
Finance
1,859
1,416
Long-term
Operating
4,969
3,441
Finance
1,035
2,592
Total lease liabilities
$
8,966
$
8,631
The Company’s ROU operating assets and finance assets are presented within Other assets and Property and equipment, net of accumulated depreciation,
respectively, in its consolidated balance sheet.
The Company’s current and long-term lease liabilities are presented within Accounts payable and accrued liabilities and Other long-term liabilities,
respectively, in its consolidated balance sheet.
As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate, based on the information available at
commencement date, in determining the present value of lease payments. The Company used the incremental borrowing rate on January 1, 2019 for operating
leases that commenced prior to that date. The weighted average borrowing rates for operating and finance leases were 10.0% and 8.7%, respectively as of
December 31, 2021.
The components of lease expense were as follows (in thousands):
Year ended December 31,
2021
2020
Lease cost
Classification
Operating lease costs
General and administrative expense
$
2,168
$
2,967
Finance lease costs
Amortization of leased assets
Depreciation and Amortization
1,101
1,215
Interest on lease liabilities
Interest expense
337
421
Short-term lease costs
General and administrative expense
—
—
Net Lease costs
$
3,606
$
4,603
The Company includes its variable lease costs under operating lease costs as these variable lease costs are immaterial.
The Company does not have any short-term leases with lease terms greater than one month.
Maturities of the Company’s lease liabilities as of December 31, 2021 were as follows (in thousands):
Year ending December 31,
Operating
Finance
2022
$
1,661
$
2,099
2023
1,460
780
2024
1,223
168
2025
1,111
95
2026
1,086
100
Thereafter
1,498
—
Total
8,039
3,242
Less: Interest
(1,967 )
(348 )
Present value of lease liabilities
$
6,072
$
2,894
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Maturities of the Company’s lease liabilities as of as of December 31, 2020 were as follows (in thousands):
Year ending December 31,
Operating
Finance
2021
$
1,615
$
1,791
2022
1,186
1,939
2023
881
643
2024
702
107
2025
595
33
Thereafter
1,092
—
Total
6,071
4,513
Less: Interest
(1,448 )
(505 )
Present value of lease liabilities
$
4,623
$
4,008
Operating and finance lease payments include $0.7 million related to options to extend lease terms that are reasonably certain of being exercised and $1.5
million related to residual value guarantees. The weighted-average remaining lease term for the Company’s operating and finance leases was 5.6 years and 1.6
years, respectively, as of December 31, 2021.
As of December 31, 2021, the Company had no additional operating leases that had not yet commenced and no lease transactions with its related parties. In
addition, as of December 31, 2021, the Company had not entered into any new sale-leaseback arrangements.
16.
FAIR VALUE
Management has established a hierarchy to classify the inputs used to measure the Company’s financial instruments at fair value, pursuant to which the
Company is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs
represent market data obtained from independent sources; whereas, unobservable inputs reflect the Company’s own market assumptions, which are used if
observable inputs are not reasonably available without undue cost and effort. The hierarchy defines three levels of inputs that may be used to measure fair value:
•
Level 1 – Unadjusted quoted market prices in active markets for identical, unrestricted assets or liabilities that the reporting entity has the ability to
access at the measurement date.
•
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable
market data for substantially the same contractual term of the asset or liability.
•
Level 3 – Unobservable inputs based on the entity’s own assumptions about the assumptions market participants would use in the pricing of the asset
or liability and are consequently not based on market activity but rather through particular valuation techniques.
The carrying value of the Company’s current assets and current liabilities on its consolidated balance sheets approximated or equaled their estimated fair values
due to their short-term nature or imputed interest rates.
Recurring Fair Value Measurement
At December 31, 2021 and 2020, the two financial instruments measured by the Company at fair value on a recurring basis were its merchandise and perpetual
care trusts, which consist of investments in debt and equity marketable securities and cash equivalents that are carried at fair value and are classified as either
Level 1 or Level 2. For further details, see Note 6 Merchandise Trusts and Note 7 Perpetual Care Trusts.
Where quoted prices are available in an active market, securities are classified as Level 1 investments pursuant to the fair value measurement hierarchy. Where
quoted market prices are not available for the specific security, fair values are estimated by using either quoted prices of securities with similar characteristics or
an income approach fair value model with observable inputs that include a combination of interest rates, yield curves, credit risks, prepayment speeds, rating and
tax-exempt status. These securities are classified as Level 2 investments pursuant to the fair value measurements hierarchy. Certain investments in the
merchandise and perpetual care trusts are excluded from the fair value leveling hierarchy in accordance with GAAP. These funds are measured at fair value
using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy.
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Non-Recurring Fair Value Measurement
The Company may be required to measure certain assets and liabilities at fair value, such as its indefinite-lived assets and long-lived assets, on a nonrecurring
basis in accordance with GAAP from time to time. These adjustments to fair value usually result from impairment charges. As of December 31, 2021, the
Company adjusted the fair value of one of its funeral homes sold in 2021 to mark it down to the selling price which was lower than the carrying value of the
funeral home on the Company’s consolidated balance sheets. As of December 31, 2020, the Company adjusted the fair value of one of its cemeteries and one of
its funeral homes sold in 2020 to mark them down to the selling prices which were lower than the carrying value of the funeral homes on the Company’s
consolidated balance sheets. As the Company’s determination of the fair value of these assets were based on the quoted prices the Company received from the
sellers, these assets held for sale were classified as Level 1 in the fair value hierarchy.
Fair Value of Financial Instruments
The Company’s financial instruments at December 31, 2021 consisted of its 2029 Notes and at December 31, 2020 consisted of its 2024 Notes (see Note 9 Long-
Term Debt). These financial instruments are classified as Level 1 in the fair value hierarchy, as their fair value measurement is based on quoted market prices,
obtained from Bloomberg, specific to the Company’s outstanding borrowings. At December 31, 2021, the estimated fair value of the 2029 Notes was $413.5
million, based on trades made on that date, compared with the carrying amount of $400.0 million. At December 31, 2020, the estimated fair value of the 2024
Notes was $350.2 million, based on trades made on that date, compared with the carrying amount of $344.8 million.
Credit and Market Risk
The Company’s financial instruments exposed to concentrations of credit risk consist primarily of its cash and cash equivalents, trade receivables, merchandise
trusts and perpetual care trusts.
The Company’s cash balances on deposit with financial institutions totaled $83.9 million and $39.2 million as of December 31, 2021 and 2020, respectively,
which exceeded Federal Deposit Insurance Corporation insured limits. The Company regularly monitors these institutions’ financial condition.
As of December 31, 2021 and 2020, the majority of the Company’s trade receivables were long-term trade account receivables, which typically consisted of
interest-bearing installment contracts not to exceed 60 months. Significant customers are those that individually account for greater than 10% of the Company’s
consolidated revenue or total accounts receivable. Due to the inherent nature of the Company’s business and consumer make-up, there were no customers whose
trade receivables with the Company represented more than 10% of the Company’s total accounts receivable as of December 31, 2021 and 2020. The Company
mitigates the credit risk associated with its long-term trade account receivables by performing credit evaluations and monitoring the payment patterns of its
customers. Management continually evaluates customer receivables for impairment based on historical experience, including the age of the receivables and the
customers’ payment pattern. The Company has a process in place to collect all receivables within 30 to 60 days of aging. As of December 31, 2021 and 2020,
the Company had $5.8 million and $5.7 million, respectively, in allowance for doubtful accounts, based on historical cancellation rate trends. The Company
wrote off $6.2 million and $6.3 million in bad debts during the years ended December 31, 2021 and 2020.
The Company’s merchandise and perpetual care trusts are invested in assets, such as individual equity securities and closed and open-ended mutual funds, with
the primary objective of maximizing income and distributable cash flow for trust distributions, while maintaining an acceptable level of risk. Certain asset
classes in which the Company invests for the purpose of maximizing yield are subject to an increased market risk. This increased market risk creates volatility in
the unrealized gains and losses of the trust assets from period to period.
The Company purchases comprehensive general liability, professional liability, automobile liability and workers’ compensation insurance coverages structured
with high deductibles. While these high-deductible insurance programs mean the Company is primarily self-insured for claims and associated costs and losses
covered by these policies, it is possible that insurers could seek to avoid or be financially unable to meet their obligations under, or a court may decline to
enforce such provisions of, the Company’s insurance programs.
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17.
RELATED PARTIES
In January 2020, the Company’s trusts completed the purchase of a $30 million participation in a new $70 million debt facility issued by a discount shoe retailer
(the “Shoe Retailer”). Funds and accounts affiliated with Axar also invested $20 million in this facility. The investment was initially proposed by the Chairman
of the Board, Mr. Axelrod. The investment was reviewed and approved in December 2019 in accordance with the Partnership’s governance policies in place at
that time. At the time of the investment, the funds and accounts affiliated with Axar owned approximately 30% of the equity of the Shoe Retailer, and Mr.
Axelrod served on the Shoe Retailer’s board of directors. The Company’s investment in the Shoe Retailer represented approximately 4% of the total fair market
value of the Company’s trust assets when the investment was made.
As of December 31, 2021, Axar beneficially owned 74.9% of the Company’s outstanding common stock, which constituted a majority of the Company’s
outstanding common stock. As a result, the Company is a “controlled company” within the meaning of NYSE corporate governance standards.
On February 1, 2021, Cornerstone Trust Management Services LLC (“Cornerstone”), a wholly-owned subsidiary of the Company, entered into a Subadvisor
Agreement (the “Agreement”) with Axar. The sole member of Axar’s general partner is Andrew M. Axelrod, who serves as the Chairman of the Company’s
Board of Directors. In connection with the execution of the Agreement, Mr. Axelrod resigned as a member of the Trust and Compliance Committee (the “Trust
Committee”) of the Board.
Pursuant to the charter of the Trust Committee, the retention of Axar as a subadvisor and the Agreement were first reviewed and approved by the Trust
Committee, subject to the condition that the retention of Axar and the Agreement also be approved by a Board committee comprised exclusively of independent
directors. Given the Axar relationship, the Board appointed a special committee to review the retention of Axar and the Agreement, which subsequently also
approved the retention of Axar and the terms of the Agreement. Both the Trust Committee and the special committee concluded that Axar had the appropriate
experience and performance record that would assist Cornerstone in performing its investment advisory obligations for the Company, that the retention of Axar
would provide back-office operational efficiencies to Cornerstone and that the financial terms were at least as favorable to Cornerstone as the terms that would
be available from other unaffiliated subadvisors, if not more favorable.
Under the terms of the Agreement, Axar agreed to provide the following services with respect to the assets held in the Company’s merchandise and perpetual
care trust (the “Trusts”) and certain pooled investment vehicles administered by the trustee of the Trusts (the “Trustee”) in which certain of the Trusts participate
or invest (collectively, the “Investment Assets”):
•
Advise Cornerstone with respect to the allocation and investment of the Investment Assets on a non-discretionary basis, including providing
advice concerning portfolio allocation among investment strategies;
•
Oversee other subcontractors or external managers engaged by Cornerstone to provide advice with respect to the Investment Assets;
•
Provide quarterly investment performance reports to and meet on a quarterly basis with the Trust Committee;
•
As requested by Cornerstone from time to time, perform the tasks and responsibilities delegated by the Trust Committee to Cornerstone under the
Company’s investment policy statement; and
•
As requested by Cornerstone, assist Cornerstone in performing its duties by providing general back office and administrative support to
Cornerstone and, at Cornerstone’s reasonable request, the Trustee.
Under the Agreement, Axar is entitled to a quarterly fee equal to 0.0125% of the value of the Investment Assets through December 31, 2021 and, thereafter, a
quarterly fee equal to 0.025% of the value of the Investment Assets. In each case, the value of the Investment Assets will be determined by the Trustee. During
the year ended December 31, 2021, the Company incurred fees of $384,000 due to Axar. Mr. Axelrod also serves at the discretion of the Trusts as a director of a
children’s retailer in which the Trusts hold an equity interest, for which he receives annual director fees from that company of $80,000. Mr. Axelrod also serves
as director of a Nevada company in which the Trusts hold an equity interest, for which he receives annual director fees from that company of $75,000. In
addition, he and an additional Axar employee serve as directors of the Shoe Retailer, for which each of them receives annual director fees from the Shoe Retailer
of $100,000.
The initial term of the Agreement is through December 31, 2021 and it automatically renews for an unlimited number of one-year terms thereafter, provided that
either party may terminate the Agreement on 90 days’ prior written notice. The Agreement also includes customary confidentiality and indemnification
provisions.
On April 13, 2021, the Company reimbursed American Infrastructure Funds LLC (“AIM”), an entity controlled by Robert B. Hellman, Jr., a former Chairman
and member of the Company's Board of Directors, $0.6 million for certain expenses incurred
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by AIM in responding to a document production request from the SEC in connection with an SEC investigation of the Company and StoneMor GP that was
settled in December 2019.
The Company is a party to a Nomination and Director Voting Agreement dated as of September 17, 2018 (as amended on February 4, 2019, June 27, 2019,
November 3, 2020 and November 20, 2020, the “DVA”) with Axar, certain funds and managed accounts for which it serves as investment manager and its
general partner, Axar GP, LLC (collectively, the “Axar Entities”), StoneMor GP Holdings LLC, a Delaware limited liability company and formerly the sole
member of StoneMor GP (“GP Holdings”), and Robert B. Hellman, Jr., as trustee under the Voting and Investment Trust Agreement for the benefit of American
Cemeteries Infrastructure Investors LLC (“ACII” and, collectively with GP Holdings, the “ACII Entities”). Under the DVA, and subject to certain conditions
and exceptions, the Axar Entities and their affiliates are prohibited from acquiring additional shares of the Company’s Common Stock. On April 13, 2021, the
Axar Entities, the ACII Entities and the Company entered into a letter agreement (the “Waiver”) pursuant to which the Axar Entities were permitted to acquire
some or all of the shares of the Company’s Common Stock held by ACII and its affiliates in a single privately negotiated transaction and not in the open market.
The terms of the Waiver were approved by the Conflicts Committee of the Company’s Board of Directors. The waiver was subject to the following conditions:
•
any such purchase be consummated on or before May 31, 2021;
•
the Company, the Axar Entities and the ACII Entities have entered into a further amendment to the DVA to clarify that the standstill period
applicable to the Axar Entities will expire on December 31, 2023;
•
Axar will vote or direct the voting of all shares of the Company’s Common Stock it beneficially owns in favor of amendments to Article VIII of
the Company’s Certificate of Incorporation (the “Charter”) relating to amendments of the Company’s Bylaws and Article X of the Charter with
respect to any amendment or repeal of Article V, Article VI(c), Article VII(a)-(d), Article VIII, Article X or Article XI of the Charter to increase
the required stockholder approval required thereunder from “at least sixty six and two thirds percent (66 2/3%)” to “at least eighty-five percent
(85%) (collectively, the “Supermajority Provisions”);” and
•
pending the effectiveness of such amendment to Article VIII and Article X of the Charter, Axar would not vote or direct the voting of any shares
of the Company’s Common Stock in favor of any proposal to which the Supermajority Provisions are applicable unless such proposal has been
approved by the Company’s Board of Directors and its Conflicts Committee.
As contemplated by the Waiver, on April 13, 2021, the Company, the Axar Entities and the ACII Entities also entered into the Fifth Amendment to the DVA
pursuant to which the parties clarified that the standstill period applicable to the Axar Entities thereunder would expire on December 31, 2023.
On September 27, 2021, the Company announced that it had received the Letter dated September 22, 2021 from Axar in which Axar expressed an interest in
pursuing discussions concerning strategic alternatives that may be beneficial to the Company and its various stakeholders. Axar has engaged Schulte Roth &
Zabel LLP as its legal advisor and stated in the Letter that it would engage a financial advisor at the appropriate time. According to the Letter, Axar expected that
any such discussions would be conducted with a special committee of the Board, assisted by financial and legal advisors engaged by such committee. The Letter
also stated that any transaction involving Axar arising from such discussions would be conditioned upon, among other things, approval of the special committee
and the Board, the negotiation and execution of mutually satisfactory definitive agreements and customary terms. The Letter also stated that any transaction
structured as a take-private transaction would be subject to a closing condition that the approval of holders of a majority of the outstanding shares not owned by
Axar or its affiliates be obtained. On September 26, 2021, the Board authorized its Conflicts Committee, which is comprised of independent directors Stephen J.
Negrotti, Kevin Patrick and Patricia Wellenbach, to engage in the discussions contemplated by the Letter, including the authority to engage in discussions
concerning and to negotiate the terms and provisions of any strategic alternative the Conflicts Committee determines to be appropriate in connection with such
discussions. Under its charter, the Conflicts Committee has the authority to reject, approve or recommend that the Board approve any transaction that is a related
party transaction, which would include any transaction to which Axar is a party. The Conflicts Committee has retained independent legal and financial advisors
to assist in such discussions. Following receipt of the Letter and until recently, the Conflicts Committee and its counsel had engaged in discussions with Axar
and Axar’s counsel, which evolved to focus on a potential offer by Axar to acquire the shares of the Company that are not owned by Axar or its affiliates. While
these negotiations had been productive, the Conflicts Committee and Axar had not come to agreement on any price that Axar would pay for such shares or on
certain other terms of any transaction, and there can be no assurance that any agreement would be reached in the future. Negotiations between the Conflicts
Committee and Axar were recently tabled in light of the work undertaken by the Conflicts Committee with respect to the independent review of certain
investments by our trusts in which Axar had an interest. See the discussion below.
The Conflicts Committee may at any time determine to resume such negotiations, but there can be no assurance that even if such negotiations are resumed, any
agreement with respect to a take-private transaction will be executed or that this or any other
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transaction will be approved or consummated. The Company does not undertake any obligation to provide any updates with respect to these matters except as
required under applicable law.
On March 9, 2021, our trusts purchased an aggregate of 43,681,528 shares (the “Nevada Company Shares”) of common stock of a Nevada company whose
primary assets now consist of cash and tax-related assets (the “Nevada Company”), representing approximately 27% of the outstanding common stock of the
Nevada Company, from three private investment funds (the “Nevada Company Sellers”) for an aggregate cash purchase price of $18.0 million. Axar had
originally agreed to acquire the Nevada Company Shares pursuant to a Securities Purchase Agreement dated December 31, 2020, among the Nevada Company
Sellers and Axar (the “Nevada Company Purchase Agreement”). On February 1, 2021, pursuant to the Subadvisor Agreement described above, Axar
recommended to Cornerstone that our trusts purchase the Nevada Company Shares. Pursuant to that recommendation, on February 4, 2021, Axar and our trusts
entered into an Assignment and Assumption Agreement (the “Nevada Company Assignment Agreement”), pursuant to which Axar agreed to assign its rights
under the Nevada Company Purchase Agreement to our trusts and our trusts agreed to assume Axar’s obligations thereunder. Axar did not receive any additional
consideration from our trusts for this assignment and has represented to us that it did not receive any consideration for this assignment from any other person.
The Nevada Company Sellers and Axar entered into the Nevada Company Purchase Agreement while the Subadvisor Agreement was being finalized. Axar has
informed us that it entered into the Nevada Company Purchase Agreement with the intention that our trusts would purchase the Nevada Company Shares
directly from the Nevada Company Sellers. Axar has represented to Cornerstone that it is not, and at the time it entered into the Nevada Company Purchase
Agreement was not, affiliated with any of the Nevada Company Sellers and did not control and was not an affiliate of Nevada Company at the time it executed
the Nevada Company Purchase Agreement or when our trusts purchased the Nevada Company Shares. Axar has recently represented to us that, at the time the
Nevada Company Purchase Agreement was signed and at all times thereafter until our trusts completed their purchase of the Nevada Company Shares, funds
and accounts affiliated with Axar owned approximately 13.8% of Nevada Company’s outstanding common stock, and that Andrew Axelrod was elected to the
board of directors of the Nevada Company on December 31, 2020. However, although Axar as a subadvisor to Cornerstone was obligated to disclose any
conflicts of interest with respect to its recommendations, neither of these facts was disclosed to Cornerstone at the time Axar recommended the purchase of the
Nevada Company Shares. The Company does not have any interest in the Nevada Company, other than our trusts’ ownership of the Nevada Company Shares.
At the time the Nevada Company Assignment Agreement was executed, neither Cornerstone nor our trusts knew of Axar’s stock ownership in Nevada Company
or that Mr. Axelrod was on Nevada Company’s board. Consequently, neither the Board’s Trust and Compliance Committee, as required by the Company’s
investment policy, nor the Board’s Audit Committee, as required by its charter, had the opportunity to review and to approve or disapprove our trusts’ execution
of the Nevada Company Assignment Agreement or their consummation of the purchase of the Nevada Company Shares contemplated thereby.
On May 15, 2021, our trusts entered into a Participation Agreement with a real estate investment trust (the “REIT”) relating to a $52 million loan made by the
REIT to certain real estate developers, which is secured by real property and bore interest at a rate of 15%. Our trusts’ participation was a $26 million investment
(the “Real Estate Loan Participation”).
We have been informed by Axar that an Axar fund formerly controlled the management company of the REIT, the Cornerstone funds’ co-investor in this
transaction, but that the Axar fund sold its interest in the management company on March 31, 2021, before our trusts entered into the Real Estate Loan
Participation transaction. Axar has represented to us that Mr. Axelrod served on the REIT’s board, including as chairman of that board, from 2018 through
November 2021, at which time he resigned from the REIT’s board. Axar has represented to us that Axar retained a 4.7% interest in the management company
that manages the REIT and is entitled to 8.75% of any returns after a 6% return to other investors in the management company. Axar has advised us that, in
connection with the sale of Axar’s interest in the management company, Axar is also entitled to a deferred payout of $300,000 per annum in the form of a
consulting fee from the management company for capital markets and other strategic advice.
Although Axar as a subadvisor to Cornerstone was obligated to disclose any conflicts of interest with respect to its recommendations, it did not disclose its
relationship with the REIT at the time it recommended this investment to Cornerstone. As a result, at the time our trusts obtained the Real Estate Loan
Participation from the REIT, neither Cornerstone nor our trusts recognized that there was an existing relationship between Axar and any entities affiliated with
the REIT, and neither the Board’s Trust and Compliance Committee, as required by the Company’s investment policy, nor the Board’s Conflicts Committee, as
required by its charter, had the opportunity to review and to approve or disapprove the consummation of such transaction. The loan made by the REIT, including
the Real Estate Loan Participation, was repaid in full on December 16, 2021, and our trusts received cash interest payments with respect to the Real Estate Loan
Participation in the aggregate amount of $2.4 million, representing all interest payable to our trusts under the Real Estate Loan Participation. As of December
31, 2021, our trusts have no ongoing interest in this investment.
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On May 17, 2021, our trusts entered into a Loan Agreement with a hotel investor and developer and certain of its subsidiaries (collectively, the “Hotel Fund”),
which was amended and restated on October 12, 2021 (such agreement, as so amended and restated, the “Hotel Fund Loan Agreement”) and subsequently
amended on December 13, 2021 and March 7, 2022. Pursuant to the Hotel Fund Loan Agreement, our trusts provided a $33.2 million mezzanine loan to the
Hotel Fund on May 19, 2021 as part of a $162.2 million loan facility originated by an unaffiliated loan fund. The participation by our trusts was based on the
recommendation of Axar under the Subadvisor Agreement. As part of the same transaction, funds and other accounts affiliated with or managed by Axar loaned
$10.0 million to the Hotel Fund on the same terms as the trusts’ loans, representing the balance of the $43.2 million mezzanine loan, and our trusts and the Axar
funds and accounts each received an origination fee equal to 4% of their respective loan amounts. The principal amount of these loans is payable on October 12,
2023, subject to acceleration under the circumstances described in the Hotel Fund Loan Agreement, and bear interest at an adjustable rate equal to one-month
LIBOR plus a spread. On February 15, 2022, the administrative agent for the lenders under the Hotel Fund Loan Agreement delivered a reservation of rights
letter to the Hotel Fund with respect to the Hotel Fund’s apparent failure to comply with several covenants in the Hotel Fund Loan Agreement, none of which
related to payment of amounts due to the lenders. As of March 1, 2022, the interest rate was 18.75%. Through March 1, 2022, the trusts have received cash
interest in the aggregate amount of $7.2 million on this loan from an interest and expense reserve account established for that purpose, representing all interest
payable to our trusts under the Hotel Fund Loan Agreement.
Axar has represented to Cornerstone that it did not own, directly or indirectly, any equity or debt securities of the Hotel Fund prior to making the loan
contemplated by the Hotel Fund Loan Agreement and did not control and was not an affiliate of the Hotel Fund. Axar has also advised us that it does not own,
directly or indirectly, any equity or debt securities of the Hotel Fund other than through its participation in the mezzanine loan. At the time the trusts’
participation in the Hotel Fund Loan Agreement was being considered by Cornerstone, Axar had provided a draft of the Hotel Fund Loan Agreement to
Cornerstone which reflected that funds and other accounts affiliated with or managed by Axar also intended to participate in the loan facility on the same terms
and conditions as our trusts, but neither Cornerstone nor our trusts recognized that such participation represented a related party transaction, and Axar has
represented to us that it did not recognize that such participation represented a related party transaction. Consequently, neither the Board’s Trust and
Compliance Committee, as required by the Company’s investment policy, nor the Board’s Conflicts Committee, as required by its charter, had the opportunity to
review and to approve or disapprove the consummation by our trusts of the transactions contemplated by the Hotel Fund Loan Agreement.
On September 27, 2021, our trusts entered into an Assignment and Acceptance Agreement (the “Holdco Loan Assignment”) with an insurance holding company
(“Holdco”) and Holdco’s then current lender (the “Initial Lender”) pursuant to which the Initial Lender agreed to assign to our trusts all of its rights, duties and
obligations under a Loan Agreement dated as of July 9, 2019 between the Initial Lender and Holdco (the “Holdco Loan Agreement”). The Initial Lender had
previously declared Holdco in default under the terms of the Holdco Loan Agreement. At the closing of the transactions contemplated by the Holdco Loan
Assignment on October 6, 2021, our trusts paid the Initial Lender $28.7 million in cash, which equaled the then outstanding principal balance of the loan under
the Holdco Loan Agreement (the “Holdco Loan”). The Company was not affiliated with either Holdco or the Initial Lender and Axar has represented to
Cornerstone that it did not control and was not an affiliate of either Holdco or the Initial Lender. Also on September 27, 2021, our trusts and Holdco entered into
the First Amendment to Loan Agreement (the “Amended Holdco Loan Agreement”) pursuant to which, among other changes, the defaults asserted by the Initial
Lender were waived and the interest rate on the Holdco Loan was increased from 10%, all of which had been payable in kind by increasing the principal balance
of the loan, to 15%, of which 10% continued to be payable in kind and 5% was payable in cash. In addition, the Amended Holdco Loan Agreement accelerated
the maturity of the Holdco Loan to the earliest of the first anniversary of the closing (subject to a six month extension at the request of Holdco with the consent
of our trusts) and the occurrence of certain other events described further below. As of March 1, 2022, the interest rate on the Holdco Loan remained at 15%.
Through March 1, 2022, the trusts have received cash interest in the aggregate amount of $0.8 million on the Holdco Loan and additional interest in the form of
an increase in the principal balance of the Holdco Loan in the amount of $1.2 million, representing all interest payable to our trusts under the Amended Loan
Agreement.
Also on September 27, 2021, Axar entered into a letter agreement with Holdco (the “Transaction Letter Agreement”) pursuant to which Holdco agreed, in order
to induce Axar to enter into the Amended Holdco Loan Agreement, that it would, if requested by Axar, enter into an agreed-upon form of purchase agreement
for the sale of the outstanding capital stock of its wholly-owned insurance company subsidiary (the “Holdco Subsidiary”) to Axar for a purchase price of $100
million, subject to certain conditions including completion by Axar of a customary due diligence investigation and regulatory approval of the transaction by the
state insurance regulator. Recently, Axar advised us that the state insurance regulators had advised Axar that regulatory approval of the transaction between
Axar and Holdco would not be granted because the contemplated purchase price included a $40 million note to be issued to Holdco, and, as a result, after further
negotiations, that Holdco and Axar entered into a purchase agreement dated January 20, 2022, which provided for a cash purchase price of $75 million, less the
outstanding amounts owed to our trusts under the Amended Holdco Loan Agreement and a fee that remained payable to the Initial Lender. Axar has advised us
that the sale to Axar under the purchase agreement remains subject to regulatory approval. Because the Holdco Loan is secured by the stock of the Holdco
Subsidiary, the Holdco Loan is required to be repaid in full upon the sale of the stock of the Holdco Subsidiary to Axar or any third party.
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The Amended Holdco Loan Agreement provides that the Holdco Loan is due and payable on the earliest of (a) October 6, 2022 (subject to a six-month extension
as discussed above), (b) an election by Holdco not to proceed with the transaction contemplated by the Transaction Letter Agreement, (c) a breach by Holdco of
any of its obligations under the Transaction Letter Agreement or any purchase agreement executed with respect to the sale of Holdco Subsidiary or (d) the
consummation of the sale of Holdco Subsidiary to Axar.
Also on September 27, 2021, (i) our trusts and Holdco entered into a letter agreement pursuant to which Holdco has paid our trusts a fee of $500,000 (the
“StoneMor Trusts Fee Letter Agreement”) and (ii) Axar and Holdco entered into an Expense Fee Letter pursuant to which Holdco agreed to pay Axar’s due
diligence expenses of up to $630,000 (the “Expense Fee Letter Agreement”). Entrance of Holdco into both the Expense Fee Letter Agreement and the StoneMor
Trusts Fee Letter Agreement were conditions to the effectiveness of the Amended Holdco Loan Agreement.
The Transaction Letter Agreement and the Expense Fee Letter Agreement were referenced in the Amended Holdco Loan Agreement. Although Axar as a
subadvisor to Cornerstone was obligated to disclose any conflicts of interest with respect to its recommendations, it did not provide a copy or disclose the terms
or provisions of the Transaction Letter Agreement or Expense Fee Letter Agreement to Cornerstone at the time it recommended that our trusts enter into the
Holdco Loan Assignment. As a result, at the time the Holdco Loan Assignment and the Amended Holdco Loan Agreement were executed, neither Cornerstone
nor our trusts was aware of Axar’s right to acquire Holdco Subsidiary from Holdco. Consequently, neither the Board’s Trust and Compliance Committee, as
required by the Company’s investment policy, nor the Board’s Conflicts Committee, as required by its charter, had the opportunity to review and to approve or
disapprove the consummation by our trusts of the transactions contemplated by the Holdco Loan Assignment and the Amended Holdco Loan Agreement.
Our management identified the Nevada Company and Hotel Fund transactions as related party transactions in February 2022 in connection with the preparation
of the Company’s consolidated financial statements for the fiscal year ended December 31, 2021. Upon management’s becoming aware of Axar’s interests in the
Nevada Company and Hotel Fund transactions, management reported such interests to the chairs of the Conflicts Committee and the Trust and Compliance
Committee, and upon Axar advising the Company of Axar’s involvement in the Holdco transaction, management reported it to the chair of the Conflicts
Committee.
Upon learning of Axar’s interests in the Nevada Company and Hotel Fund transactions, the Conflicts Committee promptly commenced an independent review
of all Axar’s investment recommendations to Cornerstone, including those trust investments in which Axar was involved, and directed its counsel to assist with
its review. Axar’s interests in the purchase of the Nevada Company Shares, the Real Estate Loan Participation, the Hotel Fund Transaction, the Holdco
transaction and certain other transactions were specifically reviewed and evaluated in March 2022 in connection with such review.
As a result of these findings, our management reconsidered the Company’s internal control over financial reporting and disclosure controls and procedures and
determined that those controls were not designed and thus did not operate effectively in the prior quarterly periods to allow us to identify related party
transactions that were required to be disclosed, which we determined to be a material weakness. For a further discussion of the ineffectiveness of the
Company’s disclosure controls and procedures and internal control over financial reporting, see Part II, Item 9A. Controls and Procedures. As part of its plan to
remediate this material weakness, Cornerstone now requires specific certifications from Axar with respect to any relationship or affiliation with or security
ownership position in any entity in whose securities any of Cornerstone’s subadvisors recommends our trusts invest, as well as specific disclosure by Axar of
any participation by Axar in any such investment. Cornerstone also intends to implement additional procedures regarding its review of recommendations by its
subadvisors, including a requirement for review and approval by a second officer of Cornerstone of any recommendations for investments over specified
amounts. As part of implementing such additional procedures, Cornerstone intends to conduct appropriate training for its employees with respect to these
procedures.
Based on their respective inquiries regarding the trusts’ investment portfolio and Axar’s investment recommendations with respect thereto, neither our
management nor the Conflicts Committee is aware of any other related party transactions that would be required to be reported as “related party transactions” in
this Annual Report on Form 10-K. The Conflicts Committee is continuing its independent review of Axar’s investment recommendations to Cornerstone,
including those trust investments in which Axar was involved, to determine what additional action may be appropriate for Cornerstone and the Company to take
with respect thereto.
In December 2021, the Company reimbursed $0.2 million on behalf of Andrew Axelrod for certain expenses incurred by Mr. Axelrod in responding to a
document production request in the Fried v. Axelrod legal matter discussed above pursuant to the provisions of the Company’s bylaws. See Note 14
Commitments and Contingencies.
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18.
SEGMENT INFORMATION
Management operates the Company in two reportable operating segments: Cemetery Operations and Funeral Home Operations. These operating segments
reflect the way the Company manages its operations and makes business decisions. Management evaluates the performance of these operating segments based
on interments performed, interment rights sold, pre-need cemetery and at-need cemetery contracts written, revenue and segment profit (loss). As a percentage of
revenue and assets, the Company’s major operations consist of its cemetery operations.
The following tables present financial information with respect to the Company’s segments (in thousands). Corporate costs represent those not directly
associated with an operating segment, such as corporate overhead, interest expense and income taxes. Corporate assets primarily consist of cash and cash
equivalents and restricted cash.
Year Ended December 31,
2021
2020
STATEMENT OF OPERATIONS DATA:
Cemetery Operations:
Revenues
$
278,950
$
237,886
Operating costs and expenses
(229,190 )
(196,411 )
Depreciation and amortization
(5,997 )
(6,474 )
Segment operating profit
$
43,763
$
35,001
Funeral Home Operations:
Revenues
43,892
41,653
Operating costs and expenses
(38,542 )
(34,789 )
Depreciation and amortization
(1,686 )
(1,824 )
Segment operating profit
$
3,664
$
5,040
Reconciliation of segment operating profit to net loss from continuing operations:
Cemetery Operations
43,763
35,001
Funeral Home Operations
3,664
5,040
Total segment profit
47,427
40,041
Corporate overhead
(39,930 )
(35,975 )
Corporate depreciation and amortization
(399 )
(854 )
Loss on sale of business and other impairments
(2,307 )
—
Other (losses) gains, net
(1,016 )
129
Loss on debt extinguishment
(40,128 )
—
Interest expense
(38,974 )
(45,537 )
Income tax benefit
18,370
4,855
Net loss from continuing operations
$
(56,957 )
$
(37,341 )
CASH FLOW DATA:
Capital expenditures:
Cemetery Operations
$
8,605
$
4,891
Funeral Home Operations
2,138
132
Corporate
1,252
1,337
Total capital expenditures
$
11,995
$
6,360
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December 31, 2021
December 31, 2020
BALANCE SHEET DATA:
Assets:
Cemetery Operations
$
1,506,504
$
1,445,217
Funeral Home Operations
128,590
130,687
Corporate
106,050
59,059
Total assets
$
1,741,144
$
1,634,963
Assets held for sale:
Cemetery Operations
$
—
$
23,500
Funeral Home Operations
—
5,075
Total assets held for sale
$
—
$
28,575
19.
SUPPLEMENTAL CONSOLIDATED CASH FLOW INFORMATION
The tables presented below provide supplemental information to the consolidated statements of cash flows regarding contract origination and maturity activity
included in the pertinent captions on the Company’s consolidated statements of cash flows (in thousands):
Year ended December 31,
2021
2020
Accounts Receivable
Pre-need/at-need contract originations (sales on credit)
(129,784 )
$
(117,716 )
Cash receipts from sales on credit (post-origination)
112,255
97,263
Changes in accounts receivable, net of allowance
$
(17,529 )
$
(20,453 )
Customer Contract Liabilities
Deferrals:
Cash receipts from customer deposits at origination, net of refunds
$
178,934
$
154,553
Withdrawals of realized income from merchandise trusts during the period
15,571
10,167
Pre-need/at-need contract originations (sales on credit)
129,784
117,716
Undistributed merchandise trust investment earnings, net
22,843
15,444
Recognition:
Merchandise trust investment income, net withdrawn as of end of period
(13,516 )
(6,816 )
Recognized maturities of customer contracts collected as of end of period
(222,477 )
(205,852 )
Recognized maturities of customer contracts uncollected as of end of period
(23,369 )
(23,601 )
Changes in customer contract liabilities
$
87,770
$
61,611
20.
SUBSEQUENT EVENTS
Acquisitions
On January 31, 2022, the Company acquired two cemeteries in Virginia for cash consideration of $5.1 million, pursuant to a definitive agreement signed on
March 23, 2021 with Daly Seven, Inc. to acquire four cemeteries for a total purchase price of $5.4 million, subject to customary working capital adjustments.
The remaining two cemeteries, which are located in North Carolina, are expected to close in the second quarter of 2022.
On March 1, 2022, the Company acquired one funeral home in Florida for a cash purchase price of $1.7 million and on March 15, 2022, the Company acquired
one combination cemetery and funeral home, a separate cemetery and a separate funeral home in West Virginia for a cash purchase price of $11.3 million, in
each case subject to customary working capital adjustments.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our
management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required
disclosure.
Our management, including the CEO and CFO, evaluated the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and
15d-15(e) under the Exchange Act as of December 31, 2021. Based on such evaluation, our CEO and CFO concluded the disclosure controls and procedures
were not effective due to the material weaknesses in internal control over financial reporting described below.
Notwithstanding these material weaknesses, based on the additional analysis and other post-closing procedures performed, management believes that the
financial statements included in this report fairly present in all material respects our financial position, results of operations, stockholders’ equity and cash flows
for the periods presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act. Our internal control over financial reporting is a process designed under the supervision of our CEO and CFO to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
Management’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures of the Company are being made
only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with policies and procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that
a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
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Management previously identified and reported material weaknesses in its Annual Report on Form 10-K for the year ended December 31, 2020. We conducted
an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021 based on the criteria set forth in Internal
Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on our
assessment, we concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2021 as a result of the
material weaknesses described below:
A. Control environment, control activities and monitoring:
The Company did not design and maintain effective internal controls over financial reporting related to control environment, control activities and monitoring
based on the criteria established in the COSO framework. More specifically, management did not implement effective oversight to support deployment of
control activities due to lack of clear and consistent accountability for the performance of internal control over financial reporting responsibilities in certain areas
important to financial reporting and implementation of related corrective actions in a timely manner.
B. Establishment and review of certain accounting policies and corresponding recognition of income statement impacts:
The Company’s controls applicable to establishment, periodic review for ongoing relevance and consistent application of material accounting policies in
conformity with GAAP relating to revenue recognition were not designed appropriately and thus failed to operate effectively. More specifically:
•
Management did not maintain effective controls over sales contract origination occurring at its site locations. Specifically, there was no
subsequent review of contract entry at site locations or corporate, as well as consistent approvals for pricing deviations.
•
Management did not have effective review and monitoring controls over revenue recognition with respect to the Accounting Standards
Codification 606, Revenues from Contracts with Customers, to timely detect misstatements in income statement and balance sheet accounts.
There was no oversight monitoring at corporate for contract cancellations and the timely and accurate servicing of contracts for proper revenue
recognition. Additionally, the Company concluded that it did not design effective controls that would lead to a timely identification of a material
error in deferred revenues.
C. Evaluation of historical deferred revenue adjustment:
The Company’s internal controls designed to prevent a material misstatement in the recorded amount of deferred revenues as of the balance sheet date were not
designed appropriately. Management did not have effective review and monitoring controls over historical contract servicing and revenue recognition at a
sufficient level of precision to detect potential misstatements of the related balance sheet accounts.
D. Identification and disclosure of Related Party transactions:
The Company’s internal controls over the identification and disclosure of related party transactions were not designed appropriately and thus failed to operate
effectively. More specifically, as noted in Note 17 Related Parties to our consolidated financial statement as of and for the year ended December 31, 2021, the
Company identified various related party transactions in connection with its year-end financial closing procedures, which had not been timely identified by
Cornerstone or disclosed in our prior quarterly periods because Cornerstone, the Company’s investment advisor subsidiary, did not have effective procedures in
place to ensure that the information needed to analyze whether investment transactions it was recommending for our trusts constituted related party transactions
was obtained and reviewed in a timely fashion.
Our management communicated the results of its assessment to the Audit Committee of the Board of Directors.
STATUS OF REMEDIATION OF MATERIAL WEAKNESSES
Management is committed to the remediation of the material weaknesses described above, as well as the continued improvement of our internal control over
financial reporting. We have identified and are implementing the actions described below to remediate the underlying causes of the control deficiencies that gave
rise to the material weaknesses. As we continue our evaluation and improve our internal control over financial reporting, management may modify the actions
described below or identify and take additional measures to address control deficiencies. Until the remediation efforts described below, including any additional
measures management identifies as necessary, are completed, and the successful testing of control operation over a sufficient period of time, the material
weaknesses described above will continue to exist.
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A. To address the material weakness in control environment, control activities and monitoring, the Company will:
•
Continue to enhance accountability and corporate monitoring to provide reasonable assurance that the Company maintains sufficient oversight
of the performance of internal controls;
•
Continue a project management office, including external consultants, with appropriate subject matter expertise to develop, oversee and monitor
the remediation plans and status of all internal control deficiencies; and
•
Provide periodic internal controls training in conjunction with the rollout of its new or enhanced internal controls.
Management will continue to review such actions and progress with the Audit Committee. The remediation of this weakness in the control environment will
contribute to the remediation of each of the additional material weaknesses described below.
B. To address the material weakness associated with the establishment and periodic review of certain accounting policies and corresponding recognition of
income statement impacts for compliance with applicable GAAP that give rise to potentially inaccurate or untimely revenue recognition, the
Company is performing the following:
•
Redesigned previously identified controls during the 4th Quarter of 2021 over sales contract origination to monitor the completeness and
accuracy of contract information recorded in the system; this includes validation of the accuracy of contract data in the contract management
system, comparing pricing to approved standard price lists, formalizing approvals for price deviations, and validating merchandise and perpetual
trust amounts and percentages. These new controls will be implemented during the 1st Quarter of 2022.
•
Implemented a vendor invoice review control over markers in the 2nd Quarter of 2020 and a similar review over casket invoices in the 3rd
Quarter of 2021 which identifies markers and caskets received and invoiced and verifies that the markers and caskets have been serviced.
•
Designing and implementing controls relating to other revenue streams (i.e., open and close, vaults) to ensure appropriate servicing and related
revenue is recognized in the proper period.
C. To address the material weakness related to the recognized amount of deferred revenue as of the balance sheet date, management will enhance its
review and monitoring controls over the historical deferred revenue balance.
D. To address the material weakness related to the identified and disclosure of related party transactions, the Company and Cornerstone will:
•
Require specific certifications from Axar with respect to any affiliation with or security ownership position in any entity in whose securities any
of Cornerstone’s subadvisors recommends our trusts invest, as well as specific disclosure by Axar of any participation by Axar in any such
investment;
•
Cornerstone will implement additional procedures regarding its review of recommendations by its subadvisors, including a requirement for
review and approval by a second officer of Cornerstone of any recommendations for investments over specified amounts; and
•
Cornerstone will conduct appropriate training for its employees with respect to these procedures.
We believe these measures will remediate the material weaknesses noted. As we continue to evaluate and work to remediate the control deficiencies that gave
rise to the material weaknesses, we may determine that additional measures or time are required to address the control deficiencies or that we need to modify or
otherwise adjust the remediation measures described above. We will continue to assess the effectiveness of our remediation efforts in connection with our
evaluation of our internal control over financial reporting. Also, we believe the corrective actions and controls need to be in operation for a sufficient period of
time for management to conclude that the control environment is operating effectively and has been adequately tested through audit procedures.
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REMEDIATION OF PREVIOUSLY REPORTED MATERIAL WEAKNESSES
To address the previously reported material weakness associated with management not having a Delegation of Authority matrix outside of the procurement
process or effective monitoring controls over the review of segregation of duties within relevant financial applications, the Company formalized a Delegation of
Authority matrix which was approved by the Board of Directors and completed a segregation of duties analysis in which all potential conflicts were addressed
by removing inappropriate employee access, identifying mitigating controls or implementing a monitoring control.
To address the previously reported material weakness associated with management not maintaining effective controls over the reconciliation of amounts
recorded in the general ledger for cemetery property and deferred revenues on the consolidated balance sheets, the Company enhanced the roll-forward
performed over cemetery property to include balances by location. The roll-forward is reviewed monthly with the focus being the cash flow amortization
adjustment, which is reviewed on a disaggregated by product type basis, as well implemented additional controls around unique product codes, approval of
purchases and coding of purchases. To address the deferred revenue material weakness, the Company enhanced the review process to include documenting all
inputs used in the reconciliation, which included documenting the source of the inputs and internal controls over completeness and accuracy. The control
execution was enhanced to include detailed steps performed in the preparation and review of the deferred revenue reconciliation, which is at a level of precision
sufficient to detect a material weakness. This review includes documenting certain expectations including analysis of where values were contradictory of
expectation, and any follow-ups identified during the review process.
To address the previously reported material weakness associated with management not having effective review and monitoring controls over the revenue, cost of
goods sold and deferred balances of pre-acquisition contracts (customer contracts written before StoneMor acquired the cemetery) at a sufficient level of
precision to timely detect potential misstatements of the related income statement and balance sheet accounts, the Company designed and implemented
additional controls to validate and monitor the servicing of pre-acquisition contracts.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Our remediation efforts were ongoing during our last fiscal quarter ended December 31, 2021. There were no other material changes in our internal control over
financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) and 15d-15(d) of the Exchange Act during the quarter ended December
31, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not Applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
DIRECTORS AND EXECUTIVE OFFICERS OF STONEMOR INC.
The following table shows information regarding our executive officers and directors as of March 1, 2022. Each director is elected for one-year terms until his or
her successor is duly elected and qualified or until his or her earlier resignation or removal.
Name
Age
Positions with StoneMor Inc.
Joseph M. Redling
63
President, Chief Executive Officer and Director
Jeffrey DiGiovanni
45
Senior Vice President and Chief Financial Officer
Thomas A. Connolly
56
Senior Vice President of Business Planning and Operations
Lindsay R. Granson
40
Senior Vice President of Sales and Marketing
Robert Page
59
Senior Vice President of Funeral Homes and Special Projects
Andrew Axelrod
39
Chairman of the Board
Spencer E. Goldenberg
39
Director
David Miller
62
Director
Stephen J. Negrotti
70
Director
Kevin D. Patrick
61
Director
Patricia D. Wellenbach
64
Director
On January 11, 2022, Austin K. So submitted his resignation from his position as Senior Vice President, Chief Legal Officer and Secretary of the Company,
which was effective as of February 7, 2022.
We are a “controlled company” within the meaning of the New York Stock Exchange listing standards. As a controlled company, we are not subject to the
requirements under those listing standards that a majority of our directors and all of the members of our Compensation, Nominating and Governance Committee
be independent. However, our Corporate Governance Guidelines do require that a majority of our directors, and the charter of our Compensation, Nominating
and Governance Committee requires that all of its members, be independent within the meaning of those standards.
We are party to a Nomination and Director Voting Agreement dated as of September 17, 2018 (as amended on February 4, 2019 and June 27, 2019, the “DVA”)
with Axar Capital Management, LP, certain funds and managed accounts for which it serves as investment manager and its general partner, Axar GP, LLC
(collectively, the “Axar Entities”), GP Holdings and Robert B. Hellman, Jr., as trustee under the Voting and Investment Trust Agreement for the benefit of
American Cemeteries Infrastructure Investors LLC (“ACII” and, collectively with GP Holdings, the “ACII Entities”). Under the DVA, the Axar Entities have the
option to designate up to three nominees to our Board (or, if the number of directors is increased, at least three-sevenths of the whole number of directors).
Following the refinancing or repayment of our Senior Secured Notes, the number of directors the Axar Entities have the right to nominate is subject to reduction
if they or their affiliates (collectively, the “Axar Group”) collectively beneficially own less than 15% of our outstanding common stock. The DVA also provided
that, for so long as the ACII Entities and their affiliates (collectively, the “ACII Group”) collectively beneficially own at least 4% of our outstanding common
stock, the ACII Entities were entitled to designate one nominee to our Board. The Axar Entities and the ACII Entities also agreed to vote their shares in favor of
the election of any such nominees. Because the ACII Entities sold all of the shares they held, they are no longer entitled to nominate any director.
Any nominee submitted by the Axar Entities or ACII is subject to the Compensation, Nominating and Governance Committee’s reasonable determination that
the nominee (i) is suitable to serve on the Board in accordance with the customary standards of suitability for directors of NYSE listed companies, (ii) is not
prohibited from serving as a director pursuant to any rule or regulation of the SEC or the NYSE and (iii) is not an employee, manager or director of any entity
engaged in the death care business. Pursuant to the terms of the DVA, the Axar Entities have designated Messrs. Axelrod, Miller and Goldenberg as nominees.
Our advance notice bylaws require that our stockholders desiring to nominate a candidate for election as a director must submit a notice to us not later than 90
days prior to the first anniversary of the date on which we mailed our proxy statement to stockholders for our most recent annual meeting of stockholders,
subject to certain exceptions, including that any such notice for
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our first annual meeting of stockholders must be submitted not later than 90 days prior to the date of the meeting or, if the date of such meeting is first publicly
announced less than 100 days prior to the meeting, at least 10 days prior to the date of the meeting. Any such notice must set forth:
•
the name and address of the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination is made;
•
the class and number of shares of our common stock that are owned beneficially and held of record by such stockholder and such beneficial owner;
•
the investment strategy or objective, if any, of such stockholder and certain specified associates who are not individuals;
•
the disclosure of any short positions or other derivative positions relating to the shares of our common stock held by such stockholder and such
beneficial owner, such information to include, and be updated to reflect any material change in, such positions from the period beginning six (6)
months prior to the nomination through the time of the annual meeting;
•
a description of any proxy, contract, arrangement, understanding or relationship pursuant to which such stockholder and such beneficial owner has a
right to vote any shares of any of our securities;
•
a representation that such stockholder is a holder of record of our stock entitled to vote at such meeting, will continue to be a holder of record of stock
entitled to vote at such meeting through the date of the meeting and intends to appear in person or by proxy at the meeting to bring such nomination
or other business before the meeting;
•
a representation as to whether such stockholder or beneficial owner intends or is part of a group that intends to deliver a proxy statement or form of
proxy to holders of at least the percentage of the voting power of our outstanding stock required to approve or adopt the proposal or to elect each such
nominee;
•
a description of any agreement, arrangement or understanding with respect to the nomination or other business between or among such stockholder,
beneficial owner or any other person, including without limitation any agreements that would be required to be disclosed pursuant to Item 5 or Item 6
of Schedule 13D under the Exchange Act (regardless of whether the requirement to file a Schedule 13D is applicable);
•
all information relating to the proposed nominee as would be required to be disclosed in solicitations of proxies for election of directors pursuant to
Regulation 14A under the Exchange Act ;
•
a description of all direct and indirect compensation and other material monetary agreements, arrangements and understandings during the previous
three years, and any other material relationships, between or among each stockholder giving notice and the beneficial owner, if any, on whose behalf
the nomination is made, on the one hand, and each proposed nominee, and his or her respective affiliates and associates, or others acting in concert
therewith, on the other hand, including, without limitation all information that would be required to be disclosed pursuant to Rule 404 promulgated
under Regulation S-K if the stockholder making the nomination and any beneficial owner on whose behalf the nomination is made, if any, or any
affiliate or associate thereof or person acting in concert therewith, were the “registrant” for purposes of such rule and the nominee were a director or
executive officer of such registrant;
•
the nominee’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected; and
•
attaching (A) a completed director nominee questionnaire in the form we require (which form the stockholder providing notice shall request from our
Secretary and which we shall provide within ten (10) days of such request) and (B) a completed and signed written representation and agreement, in
the form we require (which form the stockholder providing notice shall request from our Secretary and which we shall provide within ten (10) days of
such request), that the proposed nominee:(i) is not and will not become a party to any agreement, arrangement or understanding with, and has not
given any commitment or assurance to, any person or entity as to how such proposed nominee, if elected as one of our directors, will act or vote on
any issue or question (a “Voting Commitment”) that has not been disclosed to us or any Voting Commitment that could limit or interfere with the
proposed nominee’s ability to comply, if elected as one of our directors, with the proposed nominee’s fiduciary duties under applicable law; (ii) is not
and will not become a party to any agreement, arrangement or understanding with any person or entity other than us with respect to any direct or
indirect compensation, reimbursement or indemnification in connection with service or action as one of our directors that has not been disclosed to
us; (iii) would be in compliance, if elected as one of our directors, and will comply with, applicable law, applicable rules of the New York Stock
Exchange and all or our applicable publicly disclosed corporate governance, conflict of interest, corporate opportunity, confidentiality and stock
ownership and trading policies and guidelines; (iv) will tender, promptly following such proposed nominee’s election or reelection, an irrevocable
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resignation effective upon such proposed nominee’s failure to receive the required vote for re-election at the next meeting at which such proposed
nominee would face re-election and upon acceptance of such resignation by the Board of Directors, in accordance with the Board of Director’s
policies or guidelines on Director elections and (v) intends to serve a full term if elected as one of our directors.
EXECUTIVE OFFICERS AND BOARD MEMBERS
A brief biography for our executive officer who also serves as one of the directors of the Board is included below.
Joseph M. Redling has served as our President and Chief Executive Officer since July 18, 2018. Prior to his appointment, Mr. Redling served as the Chief
Operating Officer of Vonage Holdings. Inc., a billion-dollar communications company, where he managed the day to day operations of the company’s consumer
and B2B businesses. Prior to the Chief Operating Officer position, he was President of Consumer Services for Vonage overseeing its large consumer business
unit. Prior to that, Mr. Redling was President and Chief Executive Officer of Nutrisystem, Inc., a leader in the weight-loss industry. His experience also includes
over a decade with Time Warner and AOL where he held a number of senior executive level roles including Chief Marketing Officer, President of Paid Services
and Customer Management, President of the AOL Access Business and CEO of AOL International.
ADDITIONAL DIRECTORS
A brief biography for each non-executive director of the Board is included below.
Andrew Axelrod was appointed to and named Chairman of the Board in June 2019. Mr. Axelrod is the Managing Partner and Portfolio Manager of Axar Capital
Management L.P. (“Axar”), a firm he founded in 2015. He is ultimately responsible for all investment, risk and business management functions. Before
founding Axar, Mr. Axelrod was a Partner and Co-Head of North American Investments for Mount Kellett Capital Management from 2009 to 2014, a private
investment organization with over $7 billion of assets under management. Mr. Axelrod joined Mount Kellett at firm inception and worked there for over 6 years.
Prior to joining Mount Kellett, Mr. Axelrod worked at Kohlberg Kravis Roberts & Co. L.P. from 2007 to 2008 and The Goldman Sachs Group, Inc. from 2005
to 2007. Mr. Axelrod graduated magna cum laude with a B.S. in Economics from Duke University. Mr. Axelrod’s leadership as the Company’s largest common
shareholder and his extensive experience in financing, investments and restructurings provides critical skills to the Board as we continue to implement our
turnaround plan.
Spencer Goldenberg was appointed to the Board in June 2019. He serves as the Chief Financial Officer for Menin Hospitality, an owner and operator of hotels,
restaurants and commercial retail establishments across the United States (“U.S.”) with a concentration in the southeast U.S. and Chicago. Prior to joining
Menin Hospitality, Mr. Goldenberg was a partner in the accounting firm of Gerstle, Rosen & Goldenberg P.A. from February 2008 to June 2015. Mr.
Goldenberg has served as an independent director of Terra Income Fund 6 since April 2019, and is the chairman of its audit committee. From October 2005 until
February 2008, he served as a legislative aide to Florida State Senator Gwen Margolis. Mr. Goldenberg holds an active certified public accountant’s license in
the state of Florida. He holds a B.A. in International Affairs from Florida State University. Mr. Goldenberg’s extensive finance, accounting and audit experience
enhances the ability of the Board to oversee the Company’s financial performance and reporting.
David Miller was appointed to the Board in June 2019. Mr. Miller has served as the Chairman of the board of JG Wentworth since February 2018. Mr. Miller
served as a Senior Advisor to the Blackstone Tactical Opportunities Fund from March 2015 until February 2018. Prior to Blackstone, Mr. Miller served as Chief
Executive Officer and Chairman of JGWPT Inc., the holding company for J.G. Wentworth. Prior to JGWPT, Mr. Miller was Executive Vice President at ACE,
responsible for ACE’s International Accident and Health Insurance business. Prior to ACE, Mr. Miller was President and Chief Executive Officer of Kemper
Auto and Home Insurance. Prior to Kemper, Mr. Miller was Chief Operating Officer of Providian Direct Insurance. Mr. Miller has served as a director of
Ellington Residential Mortgage (NYSE: EARN) since 2013, a director of Lombard International Assurance since July 2015, a director of J.G. Wentworth since
January 2018 and a director of Figure Acquisition Corp I (NYSE: FACA) since February 2021. Mr. Miller has a B.S.E.E. in electrical engineering from Duke
University and an M.B.A. in Finance from The Wharton School of the University of Pennsylvania. Mr. Miller’s extensive experience as a senior executive will
provide the board of directors with additional expertise in corporate leadership and governance.
Stephen J. Negrotti was appointed to the Board in April 2018. Mr. Negrotti was most recently President and CEO of Turner Investments Inc. (“Turner”), an
investment manager, from April 2014 until October 2015. He also served as a member of the board of directors and President of the Turner Family of Mutual
Funds during that time. Mr. Negrotti has been self-employed as an independent certified public accountant and a consultant since October 2015 and was also
employed in that capacity from
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January 2012 until joining Turner. Mr. Negrotti has over 40 years of finance and administration experience. He joined Ernst & Young in Philadelphia in 1976
and was a Partner at Ernst & Young LLP from 1986 through 2011, coordinating services to financial industry clients and acting as an advisor in Ernst & Young’s
Global Private Equity practice in New York. Mr. Negrotti holds an M.B.A in Finance from Drexel University and a B.S in Accounting from The Pennsylvania
State University. Mr. Negrotti brings to the Board significant experience in financial oversight and accounting matters.
Kevin D. Patrick was appointed to the Board in September 2020. He has been Senior Vice President, Chief Financial Officer and Treasurer of Colonial
Williamsburg Foundation since August 2017. In this capacity, he is responsible for all financial aspects of the operation of the Foundation, which has assets of
approximately $1.0 billion, including an endowment of approximately $700.0 million, annual revenues in excess of $200.0 million and approximately $337.0
million in outstanding debt. As a member of the Foundation’s leadership team, Mr. Patrick works closely with the Board of Trustees and its committees. From
April 2016 until August 2017, Mr. Patrick was Vice President and Chief Financial Officer of ML Foods, LLC, a division of Marcus Lemonis LLC (CNBC’s The
Profit), focused on the franchise/restaurant/bar industry. From August 2014 through April 2016, he was an Executive Managing Partner of Blackwater Strategic
Advisors, a transaction development and strategic advisory firm. Prior to Blackwater, Mr. Patrick held leadership roles in corporate development in the
beverage, grocery, energy and telecommunications sectors completing multiple transactions. Mr. Patrick holds an M.B.A. from the University of Connecticut, a
B.B.A. in Finance from Connecticut State University and completed the Executive Development Program at the University of Pennsylvania’s Wharton School
of Business. Mr. Patrick brings to the Board diversity and significant experience in corporate development, business turnarounds, financing and financial
management both as a chief financial officer as well as other senior management positions.
Patricia D. Wellenbach was appointed to the Board in April 2018. She has been President and CEO of Philadelphia’s Please Touch Museum since November
2015. In such capacity, Ms. Wellenbach is responsible for management and oversight of one of the top 10 children’s museums in the country. The Museum
employs 100 people and has a budget of $10.0 million. In addition, Ms. Wellenbach works closely with the Museum’s board of trustees and is a steward of a
100,000 square foot building on the National Historic Register. The building is owned by the City of Philadelphia, and as such Ms. Wellenbach works closely
with city leaders on the preservation of this historic landmark building. From February 2013 to October 2015, Ms. Wellenbach was President and CEO of Green
Tree School and Services, a non-residential school and behavioral health clinic for children with autism and severe emotional disturbances. In such capacity, Ms.
Wellenbach oversaw a budget of $9.0 million, managed the construction of a new facility and negotiated contracts with two unions. The complexity of the
medical and educational needs of the children required Ms. Wellenbach to have experience with a high level of regulatory and compliance issues. From October
2007 to January 2013, Ms. Wellenbach advised companies as President and CEO of Sandcastle Strategy Group, LLC. Effective July 1, 2021, Ms. Wellenbach
was appointed chair of the board of trustees of Thomas Jefferson University, an $8 billion institution with 42,000 employees, where she has served as a board
member since July 2015. Ms. Wellenbach currently serves on the Philadelphia Mayor’s Cultural Advisory Board (from September 2016). Ms. Wellenbach
previously was a member of the board of directors at the Reinvestment Fund, a CDFI fund that makes community impact investments in areas of work force
development, charter schools, food access and other community needs, from March 2010 until December 2017. Ms. Wellenbach is also a member of the
National Association of Corporate Directors, Women Corporate Directors, the Forum of Executive Women and the Pennsylvania Women’s Forum. Ms.
Wellenbach holds a B.S. in Nursing from the Boston College School of Nursing and a certificate from the UCLA Anderson School of Management’s Healthcare
Executive Program. Ms. Wellenbach brings to the Board significant experience in managing complex businesses in transition and restructuring, merger and
acquisition experience both as a chief executive officer and as a board member and experience with risk, regulatory and compliance issues.
EXECUTIVE OFFICERS (NON-BOARD MEMBERS)
A brief biography for each of our executive officers who do not also serve on the Board are as follows:
Jeffrey DiGiovanni was appointed our Chief Financial Officer in September 2019 and had previously served as our Chief Accounting Officer since September
2018. From January 2012 until joining the Company in September 2018 as our Chief Accounting Officer, he was Managing Director at Pine Hill Group, a
leading accounting and transaction advisory firm with offices in Philadelphia, New York City and Princeton, New Jersey, where he worked with clients to
deliver services including readiness for initial public offerings, financial reporting including reporting to the SEC and technical accounting assistance on
complex transactions. He holds a B.S. in Accounting and an M.S. in Financial Services from Saint Joseph’s University and is a Certified Public Accountant.
Thomas A. Connolly was appointed our Senior Vice President of Business Planning and Operations in September 2019. Prior to joining the Company, he served
as Vice President, Business Operations for Brookstone, an omni channel business with mall, airport, ecommerce and wholesale divisions. Previously, Tom
worked for Vestis Retail Group (Bob’s Stores, Eastern Mountain
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Sports and Sport Chalet) and EMS. Tom possesses a broad range of professional competencies, including: finance, strategic planning, analytics, marketing,
ecommerce, wholesale, airport retail, merchandise planning, operations, real estate, store operations, organizational design and human resources. He earned a
B.A. in Political Science from Haverford University.
Lindsay R. Granson was appointed our Senior Vice President of Sales & Marketing in January 2021. Prior to her current role, Ms. Granson was the National
Vice President of Sales and Marketing beginning in June of 2018 after initially joining StoneMor as Vice President of Marketing in March of 2017. Prior to
joining the Company, Ms. Granson was Vice President of Sales for Watercrest Senior Living Group, from 2016 to March 2017, and prior to that Ms. Granson
spent her career in the Senior Living space in various leadership roles in both private and public sectors. She spent the majority of her Senior Living career
working for Brookdale Senior Living and holds a B.A. in Elementary Education from Wright State University.
Robert Page was appointed our Senior Vice President of Funeral Homes and Special Projects in January of 2021. Prior to his current role, Mr. Page joined
StoneMor in July of 2018 as the President of the Western Division. Prior to joining StoneMor, Mr. Page was Vice President, Operations Integration for
Foundation Partners Group from 2016 to July 2018, and prior to that Mr. Page worked for several public and private deathcare consolidators in a variety of areas
including acquisitions, financial systems, technology, sales, operations, process improvement, treasury, operational/financial reporting, and budgeting. Mr. Page
holds a B.S. in Biology from Point Loma Nazarene College and an M.B.A. from the University of Redlands.
BOARD MEETINGS AND EXECUTIVE SESSIONS, COMMUNICATIONS WITH DIRECTORS AND BOARD COMMITTEES
In fiscal year 2021, the Board held 13 meetings. Each director then in office attended at least 75% of these meetings and the meetings of the committees of the
Board on which such director served, either in person or by teleconference.
The Board holds regular executive sessions, in which non-management board members meet without any members of management present. Mr. Axelrod,
Chairman of the Board, presides at regular sessions of the non-management members of the Board. In addition, our independent directors, excluding any non-
management directors who are not independent, also meet at least annually.
Our Board welcomes communications from our stockholders and other interested parties. Stockholders and any other interested parties may send
communications to our Board, any committee of the Board, the Chairman of the Board or any other director in particular to:
StoneMor Inc.
3331 Street Road, Suite 200
Bensalem, Pennsylvania 19020
Stockholders and any other interested parties should mark the envelope containing each communication as “Stockholder Communication with Directors” and
clearly identify the intended recipient(s) of the communication. Our Vice President, General Counsel and Secretary will review each communication received
from stockholders and other interested parties and will forward the communication, as expeditiously as reasonably practicable, to the addressees if: (1) the
communication complies with the requirements of any applicable policy adopted by the Board relating to the subject matter of the communication and (2) the
communication falls within the scope of matters generally considered by the Board. To the extent the subject matter of a communication relates to matters that
have been delegated by the Board to a committee or to one of our executive officers, then our Vice President, General Counsel and Secretary may forward the
communication to the executive officer or chairman of the committee to which the matter has been delegated. The acceptance and forwarding of
communications to the members of the Board or an executive officer does not imply or create any fiduciary duty of the Board members or executive officer to
the person submitting the communications.
The Board has an Audit Committee, a Trust and Compliance Committee, a Compensation, Nominating and Governance Committee (the “Compensation
Committee”) and a Conflicts Committee. The Board appoints the members of such committees. The members of the committees and a brief description of the
functions performed by each committee are set forth below.
Audit Committee
The current members of the Audit Committee are Messrs. Goldenberg, Miller and Negrotti (Chair). The primary responsibilities of the Audit Committee are to
assist the Board in its general oversight of our financial reporting, internal controls and audit functions, and it is directly responsible for the appointment,
retention, compensation and oversight of the work of our independent
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auditors. The Audit Committee’s charter is posted on our website at www.stonemor.com under the “Corporate Governance” section of our “Investors” webpage.
Information on our website does not constitute a part of this Annual Report.
All current committee members qualify as “independent” under applicable standards established by the SEC and the NYSE for members of audit committees. In
addition, Mr. Negrotti has been determined by the Board to meet the qualifications of an "audit committee financial expert," having the necessary accounting or
related financial management expertise, in accordance with the standards established by the SEC and NYSE. The "audit committee financial expert" designation
is a disclosure requirement of the SEC related to Mr. Negrotti's experience and understanding with respect to certain accounting and auditing matters. The
designation does not impose any duties, obligations or liabilities that are greater than those generally imposed on Mr. Negrotti as a member of the Audit
Committee and the Board, and it does not affect the duties, obligations or liabilities of any other member of the Board.
Trust and Compliance Committee
The current members of the Trust and Compliance Committee are Messrs. Patrick (Chair) and Redling and Ms. Wellenbach. The primary responsibilities of the
Trust and Compliance Committee are to assist the Board in fulfilling its responsibility in the oversight management of merchandise trusts and perpetual care
trusts (collectively, the “Trusts”) and to review and recommend an investment policy for the Trusts, including (i) asset allocation, (ii) acceptable risk levels, (iii)
total return or income objectives, (iv) investment guidelines relating to eligible investments, diversification and concentration restrictions and (v) performance
objectives for specific managers or other investments. The Trust and Compliance Committee also oversees matters of non-financial compliance, including our
overall compliance with applicable legal and regulatory requirements.
Compensation, Nominating and Governance Committee
The current members of the Compensation Committee are Messrs. Goldenberg and Miller (Chair) and Ms. Wellenbach. The primary responsibilities of the
Compensation Committee are to oversee compensation decisions for our non-management directors and executives, as well as our long-term incentive plan, to
advise the Board on corporate governance matters and to select and recommend nominees for election to the Board. The Compensation Committee’s charter is
posted on our website at www.stonemor.com under the “Corporate Governance” section of our “Investors” webpage. Information on our website does not
constitute a part of this Annual Report.
Conflicts Committee
The Board established the Conflicts Committee as a standing committee in March 2021. The current members of the Conflicts Committee are Ms. Wellenbach
and Messrs. Negrotti (Chair) and Patrick. Each member of the Conflicts Committee must qualify as “independent” under applicable standards established by the
NYSE, and no member may be a designee of Axar under the DVA discussed above. The primary responsibility of the Conflicts Committee is to review matters
that may involve potential conflicts of interest including, without limitation, any proposed transaction or arrangement between the Company and Axar.
CORPORATE CODE OF BUSINESS CONDUCT AND ETHICS AND CORPORATE GOVERNANCE GUIDELINES
We have adopted a Code of Business Conduct and Ethics which is applicable to all of our directors, officers and employees, including our principal financial
officer, principal accounting officer or controller or persons performing similar functions. The Code of Business Conduct and Ethics incorporates guidelines
designed to deter wrongdoing and to promote honest and ethical conduct and compliance with applicable laws and regulations. If any amendments are made to
the Code of Business Conduct and Ethics or if we grant any waiver, including any implicit waiver, from a provision of the code to any of our financial managers,
we will disclose the nature of such amendment or waiver on our website (www.stonemor.com) or in a current report on Form 8-K. We have also adopted
Corporate Governance Guidelines which, together with the Code of Business Conduct and Ethics and our bylaws, constitute the framework for our corporate
governance.
The Code of Business Conduct and Ethics and the Corporate Governance Guidelines are publicly available on our website at www.stonemor.com under the
“Corporate Governance” section of our “Investors” webpage. Information on our website does not constitute a part of this Annual Report.
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DELINQUENT SECTION 16(a) REPORTS
Under Section 16(a) of the Securities and Exchange Act (as amended, the “Exchange Act”), directors, executive officers and beneficial owners of more than
10% of our common stock, if any, are required to file reports of ownership and reports of changes in ownership with the SEC. Our directors, executive officers
and beneficial owners of more than 10% of our common shares are also required to furnish us with copies of all such reports that are filed. Based solely on our
review of copies of such forms and amendments and on written representations from Section 16(a) reporting individuals, we believe that all of our directors and
executive officers and all beneficial owners of more than 10% of our common stock filed the required reports on a timely basis under Section 16(a) during the
year ended December 31, 2021.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth summary information relating to all compensation awarded to, earned by or paid to the individuals listed in the table below,
collectively referred to as our “named executive officers” or “NEOs,” for all services rendered in all capacities to us during the years noted:
Name and Principal Position
Year
Salary
($)
Bonus (1)
($)
Stock
Awards (2)
($)
Option Awards
(3)
($)
All Other
Compensation (4)
($)
Total
($)
Joseph M. Redling
2021
741,000
1,071,000
—
—
49
1,812,049
President and Chief
Executive Officer
2020
632,692
1,050,000
534,375
154,218
—
2,371,285
Jeffrey DiGiovanni
2021
397,000
280,000
—
—
555
677,555
Senior Vice President and
Chief Financial Officer
2020
333,173
262,500
96,615
27,883
—
720,171
Austin K. So
2021
397,000
286,250
—
—
1,963
685,213
Senior Vice President, Chief
Legal Officer and Secretary
2020
356,971
281,250
96,615
27,883
—
762,719
(1)
Represents bonus amounts earned with respect to the applicable year except as otherwise indicated. Bonuses are granted as cash awards under the 2019 Plan based on
the bonus opportunity in each NEO’s employment agreement (100% for Mr. Redling and 50% for Messrs. DiGiovanni and So). For 2021 and 2020, the Compensation
Committee established an adjusted EBITDA target calculated to include gross commissionable sales and exclude realized and unrealized gains and losses in the
Company’s merchandise and perpetual care trusts, among other adjustments. Bonuses were payable at 50%, 100% and 150% of the applicable bonus opportunity if
the Company achieved at least 90% but less than 100%, 100%-115% or more than 115%, respectively, of the target. The Compensation Committee determined that the
Company achieved more than 115% of the 2021 and 2020 targets and approved bonuses at 150% of the applicable bonus targets for 2021 and 2020.
(2)
Represents the aggregate grant date fair value of stock awards in accordance with ASC 718. The assumptions underlying this valuation are set forth in Note 11 Long-
Term Incentive Plan to our consolidated financial statements in Part II, Item 8. Financial Statements and Supplementary Data of this Annual Report.
(3)
Represents the aggregate grant date fair value of option awards in accordance with ASC 718. The assumptions underlying this valuation are set forth in Note 11 Long-
Term Incentive Plan to our consolidated financial statements in Part II, Item 8. Financial Statements and Supplementary Data of this Annual Report.
(4)
Represents the Company’s matching contribution to the employee’s 401(K) Plan.
(5)
Mr. So resigned from the Company effective February 7, 2022.
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OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2021
The following table sets forth information with respect to outstanding equity awards at December 31, 2021 for our named executive officers:
Option Awards
Stock Awards
Name
Number of
securities
underlying
unexercised
options (#)
exercisable
Number of
securities
underlying
unexercised
options (#)
unexercisable
Option
Exercise Price
$
Option Expiration
Date
Number of
Unearned
Shares of Stock
That Have
Not Vested
(#)
Market Value
of Unearned
Shares of Stock
That Have Not
Vested
($) (1)
Joseph M. Redling
1,666,666
833,334
1.20
12/18/2029
140,625
—
104,166
208,334
1.71
12/3/2030
208,334
475,002
Jeffrey DiGiovanni
300,000
150,000
1.20
12/18/2029
—
—
18,833
37,667
1.71
12/3/2030
37,667
85,881
Austin K. So
300,000
150,000
1.20
12/18/2029
—
—
18,833
37,667
1.71
12/3/2030
37,667
85,881
(1)
The market value of these outstanding awards have been computed by multiplying the closing price of our common stock on December 31, 2021 by the number of
unvested shares.
AGREEMENTS WITH NAMED EXECUTIVE OFFICERS
The following is a summary of certain material provisions of agreements between the Company and our named executive officers.
Joseph M. Redling
Joseph M. Redling and the Company are parties to an employment agreement dated June 29, 2018 pursuant to which Mr. Redling serves as the Chief Executive
Officer and Senior Vice President of the Company. Mr. Redling’s initial base salary under the agreement is $700,000 per year, which base salary is subject to
annual review by the Board. Any decrease in base salary will be made only to the extent we contemporaneously and proportionately decreases the base salaries
of all of the Company’s senior executives.
The agreement provides that Mr. Redling is eligible to receive an annual incentive cash bonus with respect to each calendar year of the Company, provided that
he will not be eligible to receive such bonus if he is not employed on the last day of the calendar year to which such bonus relates. The target amount of the cash
bonus is 100% of his base salary with respect to the applicable calendar year and is to be based on specific individual and company performance goals
established by the Compensation Committee and as described in his employment agreement.
The agreement also provided that Mr. Redling was entitled to receive an initial grant of restricted common units in the Partnership of 750,000 units. Such
restricted common units will vest, if at all, in equal quarterly installments over the four year period following the date of grant and will have rights to
distributions consistent with fully vested common units in the Partnership. The grant of such restricted common units was made on July 18, 2018, and is subject
to such other terms and conditions as are set forth in the Executive Restricted Unit Agreement entered into between Mr. Redling and the Company at the time of
grant. In accordance with the terms of the Merger Agreement, Mr. Redling’s restricted common units that had vested as of the effective date of the Partnership’s
conversion to a C-Corporation were converted into common shares, while his unvested restricted common units were converted into restricted common shares
and remain subject to the same vesting schedule.
Under the agreement, Mr. Redling is also entitled to participate in the 2019 Plan to the extent that the Company offers the 2019 Plan to all senior executives of
the Company. Mr. Redling’s participation in the 2019 Plan, if offered by the Company, shall be in an annual amount equal to 150% of his base salary, with 50%
of such annual amount vesting in equal annual installments over three years and 50% of the annual amount vesting based upon attainment of performance goals
as determined by the Executive Committee of the Board, in consultation with the Compensation Committee.
If Mr. Redling’s employment is terminated for any reason, Mr. Redling will be entitled to receive the following: (i) any base salary for days actually worked
through the date of termination; (ii) reimbursement of all expenses for which Mr. Redling is entitled to be reimbursed pursuant to the agreement, but for which
he has not yet been reimbursed; (iii) any vested accrued benefits
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under the Company’s employee benefit plans and programs in accordance with the terms of such plans and programs, as accrued through the date of
termination; (iv) vested but unissued equity in the Company; (v) any bonus or other incentive (or portion thereof) for any preceding completed calendar year that
has been awarded by the Company to Mr. Redling, but has not been received by him prior to the date of termination; (vi) accrued but unused vacation, to the
extent Mr. Redling is eligible in accordance with the Company’s policies and (vii) any other payment or benefit (other than severance benefits) to which Mr.
Redling may be entitled under the applicable terms of any written plan, program, policy, agreement, or corporate governance document of the Company or any
of their successors or assigns.
If Mr. Redling’s employment is terminated by the Company without “Cause” and not for death or “Disability” or by Mr. Redling for "Good Reason" (as such
terms are defined in the agreement), and provided that Mr. Redling enters into a release as provided for in the agreement, Mr. Redling would be entitled to
receive, in addition to the benefits described in the preceding paragraph, the following: (i) payment of 1.5 times his base salary for a period of 12 months
following the effective date of his termination, to be paid in equal installments in accordance with the normal payroll practices of the Company, commencing on
the 60th day following the date of termination, with the first payment including any amounts not yet paid between the date of termination and the date of the first
payment and (ii) a pro-rata cash bonus for the calendar year in which such termination occurs, if any, determined by the Company (subject to certain the
restrictions as set forth above), which shall be paid at the same time that annual incentive cash bonuses are paid to other executives of the Company, but in no
event later than March 15 of the calendar year following the calendar year in which the date of termination occurs.
In the event of a “Change in Control” (as such term is defined in the agreement), all outstanding equity interests granted to Mr. Redling that are subject to time-
based vesting provisions and that are not fully vested shall become fully vested as of the date of such Change in Control. The agreement also includes customary
covenants running during Mr. Redling’s employment and for 12 months thereafter prohibiting Mr. Redling from directly or indirectly competing with the
Company and from solicitation of employees, directors, officers, associates, consultants, agents or independent contractors, customers, suppliers, vendors and
others having business relationships with the Company. The agreement also contains provisions relating to protection of the Company’s property, its confidential
information and ownership of intellectual property as well as various other covenants and provisions customary for an agreement of this nature.
Jeffrey DiGiovanni
Jeffrey DiGiovanni and the Company are parties to an employment agreement dated September 19, 2019, pursuant to which Mr. DiGiovanni serves as the Chief
Financial Officer and Senior Vice President of the Company. Mr. DiGiovanni’s initial base salary under the agreement is $350,000 per year, which base salary is
subject to annual review by the Board. Any decrease in base salary will be made only to the extent the Company contemporaneously and proportionately
decreases the base salaries of all of its senior executives.
The agreement provides that Mr. DiGiovanni is eligible to receive an annual incentive cash bonus with respect to each fiscal year of the Company, provided,
except for certain qualifying terminations of employment, that he will not be eligible to receive such bonus if he is not employed on the last day of the fiscal
year to which such bonus relates. The target amount of the cash bonus is 50% of his base salary.
Under the agreement, Mr. DiGiovanni is also entitled to participate in the 2019 Plan to the extent that the Company offers the 2019 Plan to all senior executives
of the Company. Mr. DiGiovanni’s participation in the 2019 Plan, if offered by the Company, shall be in an annual amount equal to 50% of his base salary, with
50% of such annual amount vesting in equal annual installments over three years and 50% of the annual amount vesting based upon attainment of performance
goals as determined by the Compensation Committee. To the extent Mr. DiGiovanni’s employment terminates on account of “Retirement” (as such term is
defined in the agreement) during a performance period applicable to a particular 2019 Plan grant, the portion of such 2019 Plan grant that is subject to
performance goals shall be earned pro-rata based on actual performance and the number of months that Mr. DiGiovanni was employed by the Company during
the performance period. To be eligible for a pro-rated portion of the 2019 Plan grant in the event of a retirement, Mr. DiGiovanni must execute a release
substantially in the form attached to his agreement.
If Mr. DiGiovanni’s employment is terminated by the Company for “Cause” or by Mr. DiGiovanni without “Good Reason” or in the event of Mr. DiGiovanni’s
death or “Disability” (as such terms are defined in the agreement), Mr. DiGiovanni will be entitled to receive the following: (i) any base salary for days actually
worked through the date of termination; (ii) reimbursement of all expenses for which Mr. DiGiovanni is entitled to be reimbursed pursuant to the agreement, but
for which he has not yet been reimbursed; (iii) any vested accrued benefits under the Company’s employee benefit plans and programs in accordance with the
terms of such plans and programs, as accrued through the date of termination; (iv) vested but unissued equity in the Company; (v) any bonus or other incentive
(or portion thereof) for any preceding completed fiscal year that has been awarded by the
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Company to Mr. DiGiovanni, but has not been received by him prior to the date of termination; and (vi) accrued but unused vacation, to the extent Mr.
DiGiovanni is eligible in accordance with the Company’s policies.
If Mr. DiGiovanni’s employment is terminated by the Company without “Cause” or by Mr. DiGiovanni for “Good Reason” (as such terms are defined in the
agreement), and provided that Mr. DiGiovanni enters into a release as provided for in the agreement, Mr. DiGiovanni would be entitled to receive, in addition to
the benefits described in the preceding paragraph, the following: (i) payment of his base salary for a period of 12 months following the effective date of his
termination, to be paid in equal installments in accordance with the normal payroll practices of the Company, commencing on the Company’s first payroll date
following the expiration of the release revocation period, with the first payment including any amounts not yet paid between the date of termination and the date
of the first payment and (ii) a pro-rata cash bonus for the fiscal year in which such termination occurs, if any, determined by the Company (subject to certain the
restrictions as set forth above), which shall be paid at the same time that annual incentive cash bonuses are paid to other executives of the Company, but in no
event later than March 15 of the fiscal year following the fiscal year in which the date of termination occurs.
In the event of a “Change in Control” (as such term is defined in the agreement), all outstanding equity interests granted to Mr. DiGiovanni that are subject to
time-based vesting provisions and that are not fully vested shall become fully vested as of the date of such Change in Control. The agreement also includes
customary covenants running during Mr. DiGiovanni’s employment and for 12 months thereafter prohibiting Mr. DiGiovanni from directly or indirectly
competing with the Company and from solicitation of employees, directors, officers, associates, consultants, agents or independent contractors, customers,
suppliers, vendors and others having business relationships with the Company. The agreement also contains provisions relating to protection of the Company’s
property, its confidential information and ownership of intellectual property as well as various other covenants and provisions customary for an agreement of
this nature.
Austin K. So
Austin K. So and the Company were parties to an employment agreement dated June 15, 2018 pursuant to which Mr. So served as Senior Vice President, Chief
Legal Officer and Secretary of the Company until his voluntary departure from the Company effective February 7, 2022. Mr. So’s base salary under the
agreement was $375,000 per year, which base salary was subject to annual review by the Board. Any decrease in base salary would be made only to the extent
the Company contemporaneously and proportionately decreases the base salaries of all of its senior executives.
The agreement provided that Mr. So was eligible to receive an annual incentive cash bonus with respect to each fiscal year of the Company, provided that,
except for certain qualifying terminations of employment, he will not be eligible to receive such bonus if he is not employed on the last day of the fiscal year to
which such bonus relate. The amount of the cash bonus was to be targeted at 50% of his base salary with respect to the applicable fiscal year.
Under the agreement, Mr. So was also entitled to participate in the 2019 Plan to the extent that the Company offers the 2019 Plan to all senior executives of the
Company. Mr. So’s participation in the 2019 Plan, if offered by the Company, shall be in an annual amount equal to 50% of his base salary, with 50% of such
annual amount vesting in equal annual installments over three years and 50% of the annual amount vesting based upon attainment of performance goals as
determined by the Compensation Committee.
If Mr. So’s employment is terminated by the Company without "Cause" or by Mr. So for "Good Reason" (as such terms are defined in the agreement), and
provided that Mr. So enters into a release as provided for in the agreement, Mr. So would be entitled to receive, in addition to the benefits described in the
preceding paragraph, the following: (i) payment of his base salary for a period of 12 months following the effective date of his termination, to be paid in equal
installments in accordance with the normal payroll practices of the Company, commencing on the Company’s first payroll date following the expiration of the
release revocation period, with the first payment including any amounts not yet paid between the date of termination and the date of the first payment and (ii) a
pro-rata cash bonus for the fiscal year in which such termination occurs, if any, determined by the Company (subject to certain the restrictions as set forth
above), which shall be paid at the same time that annual incentive cash bonuses are paid to other executives of the Company, but in no event later than March 15
of the fiscal year following the fiscal year in which the date of termination occurs.
The agreement also includes customary covenants running during Mr. So’s employment and for 12 months thereafter prohibiting Mr. So from directly or
indirectly competing with the Company and from solicitation of employees, directors, officers, associates, consultants, agents or independent contractors,
customers, suppliers, vendors and others having business relationships with the Company. The agreement also contains provisions relating to protection of the
Company’s property, its confidential information
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and ownership of intellectual property as well as various other covenants and provisions customary for an agreement of this nature.
DIRECTOR COMPENSATION
The following table sets forth summary information of all compensation to our directors for services rendered during the year ended December 31, 2021:
Fees Earned or
Paid in Cash
Stock Awards
Total
Name (1)
($)
($) (2)
($)
Andrew Axelrod
110,000
—
110,000
Spencer E. Goldenberg
85,000
40,000
125,000
David Miller
90,000
20,000
110,000
Stephen J. Negrotti
205,000
20,000
225,000
Kevin D. Patrick
130,000
20,000
150,000
Patricia D. Wellenbach
180,000
20,000
200,000
(1)
Each director was entitled to an annual retainer of $100,000, which could be received in cash, restricted phantom shares or a combination of cash and restricted
phantom shares at the director’s election. A minimum of $20,000 of the $100,000 annual retainer payable to each director was required to be deferred and credited
quarterly, in the form of restricted phantom shares to each director, except for Mr. Axelrod who was not subject to the restricted phantom share retainer requirement
due to his affiliation with Axar. Mr. Negrotti received an annual retainer of $25,000 as Chairman of our Audit Committee. Mr. Miller received an annual retainer of
$10,000 for serving as Chairman of our Compensation Committee. Mr. Axelrod received an annual retainer of $10,000 for serving as Chairman of our Trust and
Compliance Committee. Ms. Wellenbach and Messrs. Negrotti and Patrick each received $50,000 for serving on the Conflicts Committee. Also included in the
amounts above are fees approved and paid during 2021 of $25,000 each to Ms. Wellenbach, Mr. Goldberg and Mr. Negrotti for serving on the Board’s special
committee formed during 2020 to consider an equity investment by Axar and $25,000 each to Ms. Wellenbach and Mr. Negrotti for serving on the Board’s special
committee formed during 2020 to consider and evaluate a transaction contemplated by proposal letter received in May 2020 from Axar.
(2)
The shares of restricted phantom common stock awarded as retainer compensation are credited to a mandatory deferred compensation account established for each
such person. In addition, for each restricted phantom share in such account, the Company credits the account, solely in additional restricted phantom shares, an
amount of dividend equivalent rights so as to provide the holders of restricted phantom stock a means of participating on a one-for-one basis in any dividends paid to
holders of our common stock. Payments of the participant’s mandatory deferred compensation account will be made on the earliest of (i) separation of the participant
from service as a director, (ii) disability, (iii) unforeseeable emergency, (iv) death or (v) change of control of the Company. Any such payment will be made at the
Company’s election in the Company’s common shares or cash. As of December 31, 2021, the number of restricted phantom shares credited to each director’s deferred
compensation account was as follows:
Andrew Axelrod
9,174.312
Spencer E. Goldenberg
52,338.700
David Miller
44,030.173
Stephen J. Negrotti
42,891.293
Kevin D. Patrick
8,308.526
Patricia D. Wellenbach
42,891.292
Effective January 1, 2022, the annual retainer for each director was increased to $140,000. Each director other than Mr. Axelrod will continue to be obligated to
defer receipt of a minimum of $20,000 of the retainer, which would continue to be credited quarterly in the form of restricted phantom shares, but was also given
the option, subject to approval by the Compensation, Nominating and Governance Committee, to request an increase in the deferred amount to up to $50,000,
with any such request being made on or before December 15 with respect to the following year’s retainer.
LONG-TERM INCENTIVE PLANS
The Board, on behalf of the general partner of StoneMor Partners L.P., originally approved the incentive plan (as amended from time to time, the “2019 Plan”)
effective March 27, 2019 and an amendment thereto on December 18, 2019 that increased to 8,500,000 the number of units authorized for issuance under the
incentive plan. On December 31, 2019, the Board approved the assumption of the incentive plan and all outstanding awards thereunder by the Company. On
May 5, 2020, the Board approved the second amendment to the incentive plan, which increased the number of shares of common stock reserved for delivery
under the incentive plan by 1,375,000 shares, and our stockholders approved the 2019 Plan at the 2020 Annual Meeting of Stockholders.
The 2019 Plan is intended to promote the interests of the Company by providing to employees, consultants and directors of the Company incentive
compensation awards to encourage superior performance and enhance the Company’s ability to attract and
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retain the services of individuals who are essential for its growth and profitability and to encourage them to devote their best efforts to advancing the Company’s
business.
Subject to adjustments due to recapitalization or reorganization, the maximum aggregate number of common shares which may be issued pursuant to all awards
under the 2019 Plan is 9,875,000. Common shares withheld from an award or surrendered by a recipient to satisfy certain tax withholding obligations of the
Company or in connection with the payment of an exercise price with respect to an award will not be considered to be common shares delivered under the 2019
Plan. If any award is forfeited, canceled, exercised, settled in cash or otherwise terminates or expires without the actual delivery of common shares pursuant to
the award, the common shares subject to such award will be available again for awards under the 2019 Plan.
The 2019 Plan is administered by the Compensation Committee. The Compensation Committee has full power and authority to: (i) designate participants; (ii)
determine the type or types of awards to be granted to a participant; (iii) determine the number of common shares to be covered by awards; (iv) determine the
terms and conditions of any award, including, without limitation, provisions relating to acceleration of vesting or waiver of forfeiture restrictions; (v) determine
whether, to what extent, and under what circumstances awards may be vested, settled, exercised, canceled or forfeited; (vi) interpret and administer the 2019
Plan and any instrument or agreement relating to an award made under the 2019 Plan; (vii) establish, amend, suspend or waive such rules and regulations and
delegate to and appoint such agents as it deems appropriate for the proper administration of the 2019 Plan; and (viii) make any other determination and take any
other action that the Compensation Committee deems necessary or desirable for the administration of the 2019 Plan. The Compensation Committee may correct
any defect or supply any omission or reconcile any inconsistency in the 2019 Plan or an award agreement as the Compensation Committee deems necessary or
appropriate.
Awards under the 2019 Plan may be in the form of: (i) incentive stock options qualified as such under Section 422 of the Internal Revenue Code of 1986, as
amended (the “Code”) (“Incentive Options”), (ii) options that do not qualify as incentive stock options (“Nonstatutory Options,” and together with Incentive
Options, “Options”), (iii) stock appreciation rights (“SARs”), (iv) restricted stock awards (“Restricted Stock”), which may include tandem stock dividend rights
(“SDRs”), (v) phantom stock (“Phantom Stock”), (vi) stock awards (“Stock Awards”), (vii) cash awards (“Cash Awards”), (viii) other stock-based awards
(“Other Stock-Based Awards”), (ix) dividend equivalent rights, to be granted alone or in tandem with other Awards (other than Restricted Stock or Stock
Awards) (“DERs”), (x) substitute awards (“Substitute Awards”), or (xi) performance-based awards (“Performance Awards”) (collectively referred to as
“Awards”). Awards under the 2019 Plan may be granted either alone or in addition to, in tandem with or in substitution for any other award granted under the
2019 Plan. Awards granted in addition to or in tandem with other awards may be granted either at the same time as or at a different time from the other award. If
an award is granted in substitution or exchange for another award, the Compensation Committee shall require the recipient to surrender the original award in
consideration for the grant of the new award. Awards under the 2019 Plan may be granted in lieu of cash compensation, including in lieu of cash compensation.
Summaries of the different types of awards are provided below:
Options. Under the 2019 Plan, the Committee may grant Options to Eligible Persons, including (i) Incentive Options and (ii) Nonstatutory Options. The exercise
price of each Option granted under the 2019 Plan will be stated in the Option agreement and may vary; provided, however, that, the exercise price for an Option
must not be less than the fair market value per share of Common Stock as of the date of grant of the Option (or in the case of an Incentive Option granted to an
individual who owns equity possessing more than 10% of the total combined voting power of all classes of equity of the Company or any affiliate, 110% of the
fair market value per share of Common Stock as of the date of grant). Options may be exercised as the Committee determines, but not later than ten years from
the date of grant (or in the case of an Incentive Option granted to an individual who owns equity possessing more than 10% of the total combined voting power
of all classes of equity of the Company or its affiliate, for a period of no more than five years following the date of grant). Incentive Options will not be granted
more than ten years after the earlier of the adoption of the 2019 Plan or the approval of the 2019 Plan by the stockholders of the Company. Any Incentive
Option that fails to comply with Section 422 of the Code for any reason will result in the reclassification of the Option as a Nonstatutory Option, which will be
exercisable as such. The Committee will determine the methods and form of payment for the exercise price of an Option (including, in the discretion of the
Committee, payment in shares of Common Stock, other Awards, net settlement, broker assisted exercise or other property) and the methods and forms in which
shares of Common Stock will be delivered to a participant.
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SARs. An SAR is the right to receive, in cash or in shares of Common Stock, as determined by the Committee, an amount equal to the excess of the fair market
value of one share of Common Stock on the date of exercise over the exercise price of the SAR. If an SAR is designed to comply with Treasury Regulation
Section 1.409A-l(b)(5)(i)(A), it may be granted only to Eligible Persons that are also employees, consultants or directors performing services directly for the
Company or an entity in a chain of entities that has a “controlling interest” in another entity or chain of entities, beginning with the Company and ending with
the entity for which the individual provides services. SARs that are designed to be otherwise exempt from Section 409A of the Code and its regulations may be
granted to any Eligible Person. The Committee will determine the time or times at which an SAR may be exercised in whole or in part. The grant price of an
SAR granted under the 2019 Plan will be stated in the SAR agreement and may vary; provided, however, that all SARs shall have an exercise price equal to or
greater than the fair market value of a share of Common Stock on the date of grant unless the SAR is a Substitute Award.
Restricted Stock. An Award of Restricted Stock is a grant of shares of Common Stock subject to a risk of forfeiture, restrictions on transferability and any other
restrictions imposed by the Committee in its discretion. The Committee has the authority to determine to whom Restricted Stock will be granted, the number of
shares of Restricted Stock to be granted to each participant, the duration of any restrictions, the conditions under which the Restricted Stock will become vested
or forfeited (including any events that would provide for accelerated vesting) and any other terms and conditions the Committee may establish with respect to
Awards. During the restricted period applicable to the Restricted Stock, the Restricted Stock may not be sold, transferred, pledged, hypothecated, margined or
otherwise encumbered by the participant. Restricted Stock may also provide the participant with an SDR with respect to the Restricted Stock, which may be
subject to the same forfeiture and other restrictions as the Restricted Stock, as determined by the Committee. If restricted, SDRs will be held, without interest,
until the related Restricted Stock vests or is forfeited, with the SDR being paid or forfeited at the same time, as the case may be. Absent a restriction on the
SDRs in the Award agreement, SDRs will be paid to the holder of the Restricted Stock at the same time as cash dividends are paid by the Company to its
stockholders.
Phantom Stock. A share of Phantom Stock is a notional share of Common Stock that entitles the participant to receive, no later than the 15th calendar day
following vesting, a share of Common Stock or an amount of cash equal to the fair market value of a share of Common Stock, as determined by the Committee
in its discretion. The Committee has the authority to determine the Eligible Person(s) to whom Phantom Stock will be granted, if any, the number of shares of
Phantom Stock to be granted to each participant and any other terms and conditions that the Committee may establish, including with respect to vesting or
forfeiture.
Stock Awards. Stock Awards are grants of shares of Common Stock that are not subject to a restricted period and are not subject to an exercise price or
settlement features. The Committee may grant Stock Awards to any Eligible Person in such amounts as the Committee, in its sole discretion, may select.
Other Stock-Based Awards and Cash Awards. The Committee may grant Other Stock-Based Awards, which are Awards that may be denominated or payable in,
valued in whole or in part by reference to or otherwise based on, or related to, shares of Common Stock, including, without limitation, convertible or
exchangeable debt securities, other rights convertible or exchangeable into shares of Common Stock, purchase rights for shares of Common Stock, Awards with
value and payment contingent upon performance of the Company or any other factors designated by the Committee and Awards valued by reference to the book
value of shares of Common Stock or the value of securities of or the performance of specified affiliates of the Company. The Committee shall determine the
terms and conditions of any such Other Stock-Based Award. Cash Awards may also be granted under the 2019 Plan as an element of or a supplement to any
other Award or independent of any other Award.
DERs. A DER is a dividend equivalent right, granted alone or in tandem with a specific Award (other than Restricted Stock or a Stock Award), to receive with
respect to each share of Common Stock subject to the Award an amount in cash equal to the cash dividends paid by the Company with respect to a share of
Common Stock during the period such Award is outstanding. The DER may be paid directly to the participant, be credited to a bookkeeping account subject to
the same vesting restrictions as the tandem Award, if any, or be subject to such other provisions or restrictions as determined by the Committee in its sole
discretion. Absent a contrary provision in the Award agreement, DERs will be paid to the participant at the same time as cash dividends are paid by the
Company to its stockholders.
Performance Awards. The grant, exercise or settlement of an Award may be conditioned on the satisfaction of certain performance criteria. The Committee shall
determine the terms of any performance conditions attached to an Award, and the performance period for which those conditions will apply. Performance
conditions may include, but are not limited to, the following: (A) earnings per share, (B) revenues, (C) cash flow, (D) cash flow from operations, (E) cash flow
return, (F) return on net assets, (G) return on assets, (H) return on investment, (I) return on capital, (J) return on equity, (K) economic value added, (L) operating
margin, (M) contribution margin, (N) net income, (O) net income per share, (P) pretax earnings, (Q) pretax earnings before interest, depreciation and
amortization, (R) pretax operating earnings after interest expense and before incentives, service fees
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and extraordinary or special items, (S) total stockholder return, (T) debt reduction, (U) market share, (V) change in the fair market value of the Common Stock,
(W) operating income and (X) any of the above goals determined on an absolute or relative basis or as compared to the performance of a published or special
index deemed applicable by the Committee including, but not limited to, the Standard & Poor’s 500 Stock Index or a group of comparable companies.
Performance goals may differ for performance awards granted to any one participant or to different participants. Performance goals shall be established by the
Committee not later than 90 days after the beginning of any performance period applicable to such Award.
Substitute Awards. Substitute Awards may be granted in substitution for similar awards held by individuals who become Eligible Persons as a result of a merger,
consolidation or acquisition by the Company or its affiliate of another entity or the assets of another entity. Awards may also be granted in substitution for any
other Award granted under the 2019 Plan or any award granted under any other plan of the Company or any of its affiliates. If an Award is granted in substitution
for another Award, the Committee shall require the surrender of such other Award in consideration for the grant of the new Award.
Change in Control
Upon a change of control of the Company, the Compensation Committee may undertake one or more of the following actions, which may vary among
individual holders and awards: (i) remove forfeiture restrictions on any award; (ii) accelerate the time of exercisability or lapse of a restricted period; (iii)
provide for cash payment with respect to outstanding awards by requiring the mandatory surrender of all or some of outstanding awards; (iv) cancel awards that
remain subject to a restricted period without payment to the recipient of the award; or (v) make certain adjustments to outstanding awards as the Compensation
Committee deems appropriate.
If a director’s membership on the Board terminates for any reason, or an employee’s employment with the Company terminates for any reason, his or her
unvested awards will be automatically forfeited unless, and then only to the extent that, our Compensation Committee or grant agreements provide otherwise.
The 2019 Plan became effective on the date of its approval by the Board as of December 18, 2019. The 2019 Plan will continue in effect until the earliest of (i)
the date determined by the Board; (ii) the date that all common shares available under the 2019 Plan have been delivered to participants; or (iii) the tenth
anniversary of the approval of the 2019 Plan by the Board. The authority of the Board or the Compensation Committee to amend or terminate any award granted
prior to such termination, as well as the awards themselves, will extend beyond such termination date.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table shows the amount and percentage of the outstanding shares of our common stock that each of our named executive officers, each of our
directors, each person whom we believe beneficially owns 5% or more of the outstanding shares of our common stock and all of our directors and executive
officers as a group as of March 1, 2022. Unless otherwise indicated, the beneficial owner named in the table is deemed to have sole voting and sole dispositive
power of the shares of common stock set forth opposite such beneficial owner’s name.
Name of Beneficial Owner
Position
Amount of
Beneficial
Ownership
Percent
of Class
Joseph M. Redling
President, Chief Executive Officer and a Director
1,401,334
1.2 %
Jeffrey DiGiovanni
Senior Vice President and Chief Financial Officer
59,182
*
Austin K. So
Senior Vice President, Chief Legal Officer and Secretary
133,100
*
Andrew Axelrod
Director
88,633,045
74.9 %
Spencer E. Goldenberg
Director
10,000
*
David Miller
Director
941,432
*
Stephen J. Negrotti
Director
48,634
*
Kevin D. Patrick
Director
—
*
Patricia D. Wellenbach
Director
6,064
*
All current directors and executive officers as a group (11 persons)
91,179,323
77.1 %
Axar Capital Management, LP (1330 Avenue of the Americas, 30th Floor, New York, NY 10019)
88,633,045
74.9 %
*
Less than one percent
(1)
Excludes 234,375 shares of restricted common stock included in the award of 750,000 restricted common units granted to Mr. Redling in 2018 and 312,500 shares of
unvested restricted common stock granted in 2020.
(2)
Excludes 56,500 shares of unvested restricted common stock granted in 2020.
(3)
Represents shares beneficially owned by Axar Capital Management, LP as investment manager for certain funds and managed accounts with respect to the shares they hold.
Mr. Axelrod is the sole member of Axar GP, LLC, the general partner of Axar Capital Management, LP.
(4)
Information other than percentage of class beneficially owned is based on a Schedule 13D/A filed on September 24, 2021.
The following table details information regarding the 2019 Plan as of December 31, 2021:
Equity Compensation Plan Information
Plan category
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(a)
(b)
( c)
Equity compensation plan approved by security holders
6,075,000
$
1.27
830,512
Equity compensation plan not approved by security holders
—
—
—
Total
6,075,000
$
1.27
830,512
(1)
Excludes 149,783 phantom shares and 1,128,125 restricted shares awarded under the 2019 Plan.
For more information related to our 2019 Plan, see Note 11 Long-Term Incentive Plan to our consolidated financial statements in Part II, Item 8. Financial
Statements and Supplementary Data of this Annual Report.
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(1)
(2)
(3)(4)
(4)
(1)
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
INDEPENDENCE OF DIRECTORS
For a list of our directors as of March 1, 2022, see Part III, Item 10, Directors, Executive Officers and Corporate Governance in this Annual Report. Our Board
has concluded that all of our directors other than Andrew M. Axelrod and Joseph M. Redling, and all of the members of our Audit Committee and our
Compensation Committee, are independent within the meaning of the NYSE listing standards.
RELATED PARTY TRANSACTIONS POLICY AND PROCEDURES
As set forth in the Audit Committee charter, it is our policy that we will not enter into any transaction that would need to be disclosed in this Item 13 unless the
Audit Committee or another independent body of the Board first reviewed and approved the transaction. In March 2021 our Board established and approved a
charter for the Conflicts Committee which delegates to the Conflicts Committee the responsibility for reviewing and, as it determines appropriate, rejecting or
approving or recommending to the Board that it approve such transactions.
As of March 1, 2022, Axar beneficially owned 74.9% of our outstanding common stock, which constituted a majority of our outstanding common stock. As a
result, we are a “controlled company” within the meaning of NYSE corporate governance standards. For discussion on certain risks and uncertainties
attributable to us being a controlled company, see Part I, Item 1A. Risk Factors of this Annual Report.
In January 2020, our trusts completed the purchase of a $30 million participation in a new $70 million debt facility issued by a discount shoe retailer (the “Shoe
Retailer”). Funds and accounts affiliated with Axar also invested $20 million in this facility. The investment was initially proposed by the Chairman of the
Board, Mr. Axelrod. The investment was reviewed and approved in December 2019 in accordance with the Partnership’s governance policies in place at that
time. At the time of the investment, the funds and accounts affiliated with Axar owned approximately 30% of the equity of the Shoe Retailer, and Mr. Axelrod
served on the Shoe Retailer’s board of directors. The amount of the investment represented approximately 4% of the total fair market value of the Company’s
trust assets when it was made.
On April 1, 2020, we entered into a letter agreement (the “Axar Commitment”) with Axar pursuant to which Axar committed to (a) purchase shares of our Series
A Preferred Stock with an aggregate purchase price of $8.8 million on April 3, 2020, (b) exercise its basic rights in the rights offering by tendering the shares of
Series A Preferred Stock so purchased for shares of our common stock, $0.01 par value per share and (c) purchase any shares offered in the rights offering for
which other stockholders do not exercise their rights, up to a maximum of an additional $8.2 million of such shares. We did not pay Axar any commitment,
backstop or other fees in connection with the Axar Commitment.
On April 3, 2020, as contemplated by the Axar Commitment, we and Axar CL SPV LLC, Star V Partners LLC and Blackwell Partners LLC –Series E. (the
“2020 Purchasers”) entered into a Series A Preferred Stock Purchase Agreement pursuant to which we sold 176 shares of our Series A Preferred Stock, par value
$0.01 per share, for a cash price of $50,000 per share, an aggregate of $8.8 million. The 2020 Purchasers are funds or accounts managed by Axar.
On May 27, 2020, we entered into a Common Stock Purchase Agreement (the “Common Stock Purchase Agreement”) with Axar, the accounts managed by Axar
set forth on Schedule B thereto and one or more accounts managed by Axar to be designated by it (collectively, the “Purchasers”) pursuant to which we agreed
to sell an aggregate of 23,287,672 shares of our Common Stock, par value $0.01 per share to the Purchasers at a price of $0.73 per share, an aggregate of $17.0
million. Because our common stock had been trading at a price less than the $0.73 subscription price for the rights offering described above and that under
similar circumstances our previous rights offering received only 10% participation, our Board of Directors determined and Axar agreed in the Common Stock
Purchase Agreement to amend the Axar Commitment to provide for a direct purchase of the 23,287,672 shares of common stock and avoid the expense of
proceeding with the rights offering while obtaining the same per share and aggregate purchase price contemplated by the Axar Commitment.
On June 19, 2020, we completed the sale of the aggregate of 23,287,672 shares of our Common Stock (the “New Common Shares”) as contemplated by the
Common Stock Purchase Agreement. We issued and sold to the Purchasers, and the Purchasers acquired and purchased from us, (a) 12,054,795 New Common
Shares in exchange for the surrender of 176 shares of Preferred Shares purchased on April 3, 2020, with a stated value of $8.8 million (an exchange ratio of
68,493.15 New Common Shares for each share of Series A Preferred Stock surrendered), and (b) 11,232,877 New Common Shares for a cash purchase price of
$0.73 per share, an aggregate of $8.2 million.
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On May 27, 2020, we announced that we received the Proposal, dated May 24, 2020, from Axar proposing to acquire all of our outstanding shares of common
stock not owned by Axar or its affiliates for $0.67 per share in cash, subject to certain conditions. On May 26, 2020, our Board of Directors formed the Special
Committee consisting of independent directors to consider and evaluate the transaction contemplated by the Proposal. The Special Committee retained
independent legal and financial advisors to assist in its review and evaluation of the proposed transaction and had been authorized by the Board to reject the
proposed transaction or to recommend that the Board of Directors approve the terms of the proposed transaction. On June 16, 2020, we announced that the
Special Committee sent a letter to Axar informing it that, after reviewing the Proposal, it had rejected the price proposed by Axar as inadequate. On July 31,
2020, we announced that the Special Committee of the board of directors had received an Amended Proposal from Axar proposing to acquire all of the
outstanding shares of common stock of the Company not owned by Axar or its affiliates for $0.80 per share in cash, subject to certain conditions. On September
8, 2020, we announced that Axar, after determining that it would not be able to reach an agreement with the Special Committee on terms that would be
satisfactory to Axar, had withdrawn its proposal to acquire all of the outstanding shares of common stock of the Company not owned by Axar or its affiliates.
On February 1, 2021, Cornerstone Trust Management Services LLC (“Cornerstone”), a wholly-owned subsidiary of the Company, entered into a Subadvisor
Agreement (the “Agreement”) with Axar. The sole member of Axar’s general partner is Andrew M. Axelrod, who serves as the Chairman of the Company’s
Board of Directors. In connection with the execution of the Agreement, Mr. Axelrod resigned as a member of the Trust and Compliance Committee of the
Board.
Pursuant to the charter of the Trust Committee, the retention of Axar as a subadvisor and the Agreement were first reviewed and approved by the Trust
Committee, subject to the condition that the retention of Axar and the Agreement also be approved by a Board committee comprised exclusively of independent
directors. Given the Axar relationship, the Board appointed a special committee to review the retention of Axar and the Agreement, which subsequently also
approved the retention of Axar and the terms of the Agreement. Both the Trust Committee and the special committee concluded that Axar had the appropriate
experience and performance record that would assist Cornerstone in performing its investment advisory obligations for the Company, that the retention of Axar
would provide back-office operational efficiencies to Cornerstone and that the financial terms were at least as favorable to Cornerstone as the terms that would
be available from other unaffiliated subadvisors, if not more favorable.
Under the terms of the Agreement, Axar agreed to provide the following services with respect to the assets held in the Company’s merchandise and perpetual
care trust (the “Trusts”) and certain pooled investment vehicles administered by the trustee of the Trusts (the “Trustee”) in which certain of the Trusts participate
or invest (collectively, the “Investment Assets”):
•
Advise Cornerstone with respect to the allocation and investment of the Investment Assets on a non-discretionary basis, including providing advice
concerning portfolio allocation among investment strategies;
•
Oversee other subcontractors or external managers engaged by Cornerstone to provide advice with respect to the Investment Assets;
•
Provide quarterly investment performance reports to and meet on a quarterly basis with the Trust Committee;
•
As requested by Cornerstone from time to time, perform the tasks and responsibilities delegated by the Trust Committee to Cornerstone under the
Company’s investment policy statement; and
•
As requested by Cornerstone, assist Cornerstone in performing its duties by providing general back office and administrative support to Cornerstone
and, at Cornerstone’s reasonable request, the Trustee.
Under the Agreement, Axar will be entitled to a quarterly fee equal to 0.0125% of the value of the Investment Assets through December 31, 2021 and, thereafter,
a quarterly fee equal to 0.025% of the value of the Investment Assets. In each case, the value of the Investment Assets will be determined by the Trustee. The
Agreement also includes customary confidentiality and indemnification provisions. Mr. Axelrod also serves at the discretion of our trusts as a director of a
children’s retailer in which our trusts hold an equity interest, for which he receives annual director fees from that company of $80,000. Mr. Axelrod also serves
as director of a Nevada company in which our trusts hold an equity interest, for which he receives annual director fees from that company of $75,000. In
addition, he and an additional Axar employee serve as directors of the Shoe Retailer, for which each of them receives annual director fees from the Shoe Retailer
of $100,000.
The initial term of the Agreement is through December 31, 2021 and it automatically renews for an unlimited number of one-year terms thereafter, provided that
either party may terminate the Agreement on 90 days’ prior written notice.
On April 13, 2021, the Company reimbursed American Infrastructure Funds LLC (“AIM”), an entity controlled by Robert B. Hellman, Jr., a former Chairman
and member of the Company's Board of Directors, $0.6 million for certain expenses incurred
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by AIM in responding to a document production request from the SEC in connection with an SEC investigation of the Company and StoneMor GP that was
settled in December 2019.
The Company is a party to a Nomination and Director Voting Agreement dated as of September 17, 2018 (as amended on February 4, 2019, June 27, 2019,
November 3, 2020 and November 20, 2020, the “DVA”) with Axar, certain funds and managed accounts for which it serves as investment manager and its
general partner, Axar GP, LLC (collectively, the “Axar Entities”), StoneMor GP Holdings LLC, a Delaware limited liability company and formerly the sole
member of StoneMor GP (“GP Holdings”), and Robert B. Hellman, Jr., as trustee under the Voting and Investment Trust Agreement for the benefit of American
Cemeteries Infrastructure Investors LLC (“ACII” and, collectively with GP Holdings, the “ACII Entities”). Under the DVA, and subject to certain conditions
and exceptions, the Axar Entities and their affiliates are prohibited from acquiring additional shares of the Company’s Common Stock. On April 13, 2021, the
Axar Entities, the ACII Entities and the Company entered into a letter agreement (the “Waiver”) pursuant to which the Axar Entities were permitted to acquire
some or all of the shares of the Company’s Common Stock held by ACII and its affiliates in a single privately negotiated transaction and not in the open market.
The terms of the Waiver were approved by the Conflicts Committee of the Company’s Board of Directors. The waiver was subject to the following conditions:
•
any such purchase be consummated on or before May 31, 2021;
•
the Company, the Axar Entities and the ACII Entities have entered into a further amendment to the DVA to clarify that the standstill period
applicable to the Axar Entities will expire on December 31, 2023;
•
Axar will vote or direct the voting of all shares of the Company’s Common Stock it beneficially owns in favor of amendments to Article VIII of
the Company’s Certificate of Incorporation (the “Charter”) relating to amendments of the Company’s Bylaws and Article X of the Charter with
respect to any amendment or repeal of Article V, Article VI(c), Article VII(a)-(d), Article VIII, Article X or Article XI of the Charter to increase
the required stockholder approval required thereunder from “at least sixty six and two thirds percent (66 2/3%)” to “at least eighty-five percent
(85%) (collectively, the “Supermajority Provisions”);” and
•
pending the effectiveness of such amendment to Article VIII and Article X of the Charter, Axar would not vote or direct the voting of any shares
of the Company’s Common Stock in favor of any proposal to which the Supermajority Provisions are applicable unless such proposal has been
approved by the Company’s Board of Directors and its Conflicts Committee.
As contemplated by the Waiver, on April 13, 2021, the Company, the Axar Entities and the ACII Entities also entered into the Fifth Amendment to the DVA
pursuant to which the parties clarified that the standstill period applicable to the Axar Entities thereunder would expire on December 31, 2023.
On September 27, 2021, the Company announced that it had received the Letter dated September 22, 2021 from Axar in which Axar expressed an interest in
pursuing discussions concerning strategic alternatives that may be beneficial to the Company and its various stakeholders. Axar has engaged Schulte Roth &
Zabel LLP as its legal advisor and stated in the Letter that it would engage a financial advisor at the appropriate time. According to the Letter, Axar expected that
any such discussions would be conducted with a special committee of the Board, assisted by financial and legal advisors engaged by such committee. The Letter
also stated that any transaction involving Axar arising from such discussions would be conditioned upon, among other things, approval of the special committee
and the Board, the negotiation and execution of mutually satisfactory definitive agreements and customary terms. The Letter also stated that any transaction
structured as a take-private transaction would be subject to a closing condition that the approval of holders of a majority of the outstanding shares not owned by
Axar or its affiliates be obtained. On September 26, 2021, the Board authorized its Conflicts Committee, which is comprised of independent directors Stephen J.
Negrotti, Kevin Patrick and Patricia Wellenbach, to engage in the discussions contemplated by the Letter, including the authority to engage in discussions
concerning and to negotiate the terms and provisions of any strategic alternative the Conflicts Committee determines to be appropriate in connection with such
discussions. Under its charter, the Conflicts Committee has the authority to reject, approve or recommend that the Board approve any transaction that is a related
party transaction, which would include any transaction to which Axar is a party. The Conflicts Committee has retained independent legal and financial advisors
to assist in such discussions. Following receipt of the Letter and until recently, the Conflicts Committee and its counsel had engaged in discussions with Axar
and Axar’s counsel, which evolved to focus on a potential offer by Axar to acquire the shares of the Company that are not owned by Axar or its affiliates. While
these negotiations had been productive, the Conflicts Committee and Axar had not come to agreement on any price that Axar would pay for such shares or on
certain other terms of any transaction, and there can be no assurance that any agreement would be reached in the future. Negotiations between the Conflicts
Committee and Axar were recently tabled in light of the work undertaken by the Conflicts Committee with respect to the independent review of certain
investments by our trusts in which Axar had an interest.
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The Conflicts Committee may at any time determine to resume such negotiations, but there can be no assurance that even if such negotiations are resumed, any
agreement with respect to a take-private transaction will be executed or that this or any other transaction will be approved or consummated. The Company does
not undertake any obligation to provide any updates with respect to these matters except as required under applicable law.
On March 9, 2021, our trusts purchased an aggregate of 43,681,528 shares (the “Nevada Company Shares”) of common stock of a Nevada company whose
primary assets now consist of cash and tax-related assets (the “Nevada Company”), representing approximately 27% of the outstanding common stock of the
Nevada Company, from three private investment funds (the “Nevada Company Sellers”) for an aggregate cash purchase price of $18.0 million. Axar had
originally agreed to acquire the Nevada Company Shares pursuant to a Securities Purchase Agreement dated December 31, 2020, among the Nevada Company
Sellers and Axar (the “Nevada Company Purchase Agreement”). On February 1, 2021, pursuant to the Subadvisor Agreement described above, Axar
recommended to Cornerstone that our trusts purchase the Nevada Company Shares. Pursuant to that recommendation, on February 4, 2021, Axar and our trusts
entered into an Assignment and Assumption Agreement (the “Nevada Company Assignment Agreement”), pursuant to which Axar agreed to assign its rights
under the Nevada Company Purchase Agreement to our trusts and our trusts agreed to assume Axar’s obligations thereunder. Axar did not receive any additional
consideration from our trusts for this assignment and has represented to us that it did not receive any consideration for this assignment from any other person.
The Nevada Company Sellers and Axar entered into the Nevada Company Purchase Agreement while the Subadvisor Agreement was being finalized. Axar has
informed us that it entered into the Nevada Company Purchase Agreement with the intention that our trusts would purchase the Nevada Company Shares
directly from the Nevada Company Sellers. Axar has represented to Cornerstone that it is not, and at the time it entered into the Nevada Company Purchase
Agreement was not, affiliated with any of the Nevada Company Sellers and did not control and was not an affiliate of Nevada Company at the time it executed
the Nevada Company Purchase Agreement or when our trusts purchased the Nevada Company Shares. Axar has recently represented to us that, at the time the
Nevada Company Purchase Agreement was signed and at all times thereafter until our trusts completed their purchase of the Nevada Company Shares, funds
and accounts affiliated with Axar owned approximately 13.8% of Nevada Company’s outstanding common stock, and that Andrew Axelrod was elected to the
board of directors of the Nevada Company on December 31, 2020. However, although Axar as a subadvisor to Cornerstone was obligated to disclose any
conflicts of interest with respect to its recommendations, neither of these facts was disclosed to Cornerstone at the time Axar recommended the purchase of the
Nevada Company Shares. The Company does not have any interest in the Nevada Company, other than our trusts’ ownership of the Nevada Company Shares.
At the time the Nevada Company Assignment Agreement was executed, neither Cornerstone nor our trusts knew of Axar’s stock ownership in Nevada Company
or that Mr. Axelrod was on Nevada Company’s board. Consequently, neither the Board’s Trust and Compliance Committee, as required by the Company’s
investment policy, nor the Board’s Audit Committee, as required by its charter, had the opportunity to review and to approve or disapprove our trusts’ execution
of the Nevada Company Assignment Agreement or their consummation of the purchase of the Nevada Company Shares contemplated thereby.
On May 15, 2021, our trusts entered into a Participation Agreement with a real estate investment trust (the “REIT”) relating to a $52 million loan made by the
REIT to certain real estate developers, which is secured by real property and bore interest at a rate of 15%. Our trusts’ participation was a $26 million investment
(the “Real Estate Loan Participation”).
We have been informed by Axar that an Axar fund formerly controlled the management company of the REIT, the Cornerstone funds’ co-investor in this
transaction, but that the Axar fund sold its interest in the management company on March 31, 2021, before our trusts entered into the Real Estate Loan
Participation transaction. Axar has represented to us that Mr. Axelrod served on the REIT’s board, including as chairman of that board, from 2018 through
November 2021, at which time he resigned from the REIT’s board. Axar has represented to us that Axar retained a 4.7% interest in the management company
that manages the REIT and is entitled to 8.75% of any returns after a 6% return to other investors in the management company. Axar has advised us that, in
connection with the sale of Axar’s interest in the management company, Axar is also entitled to a deferred payout of $300,000 per annum in the form of a
consulting fee from the management company for capital markets and other strategic advice.
Although Axar as a subadvisor to Cornerstone was obligated to disclose any conflicts of interest with respect to its recommendations, it did not disclose its
relationship with the REIT at the time it recommended this investment to Cornerstone. As a result, at the time our trusts obtained the Real Estate Loan
Participation from the REIT, neither Cornerstone nor our trusts recognized that there was an existing relationship between Axar and any entities affiliated with
the REIT, and neither the Board’s Trust and Compliance Committee, as required by the Company’s investment policy, nor the Board’s Conflicts Committee, as
required by its charter, had the opportunity to review and to approve or disapprove the consummation of such transaction. The loan made by the REIT, including
the Real Estate Loan Participation, was repaid in full on December 16, 2021, and our trusts
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received cash interest payments with respect to the Real Estate Loan Participation in the aggregate amount of $2.4 million, representing all interest payable to
our trusts under the Real Estate Loan Participation. As of December 31, 2021, our trusts have no ongoing interest in this investment.
On May 17, 2021, our trusts entered into a Loan Agreement with a hotel investor and developer and certain of its subsidiaries (collectively, the “Hotel Fund”),
which was amended and restated on October 12, 2021 (such agreement, as so amended and restated, the “Hotel Fund Loan Agreement”) and subsequently
amended on December 13, 2021 and March 7, 2022. Pursuant to the Hotel Fund Loan Agreement, our trusts provided a $33.2 million mezzanine loan to the
Hotel Fund on May 19, 2021 as part of a $162.2 million loan facility originated by an unaffiliated loan fund. The participation by our trusts was based on the
recommendation of Axar under the Subadvisor Agreement. As part of the same transaction, funds and other accounts affiliated with or managed by Axar loaned
$10.0 million to the Hotel Fund on the same terms as the trusts’ loans, representing the balance of the $43.2 million mezzanine loan, and our trusts and the Axar
funds and accounts each received an origination fee equal to 4% of their respective loan amounts. The principal amount of these loans is payable on October 12,
2023, subject to acceleration under the circumstances described in the Hotel Fund Loan Agreement, and bear interest at an adjustable rate equal to one-month
LIBOR plus a spread. On February 15, 2022, the administrative agent for the lenders under the Hotel Fund Loan Agreement delivered a reservation of rights
letter to the Hotel Fund with respect to the Hotel Fund’s apparent failure to comply with several covenants in the Hotel Fund Loan Agreement, none of which
related to payment of amounts due to the lenders. As of March 1, 2022, the interest rate was 18.75%. Through March 1, 2022, the trusts have received cash
interest in the aggregate amount of $7.2 million on this loan from an interest and expense reserve account established for that purpose, representing all interest
payable to our trusts under the Hotel Fund Loan Agreement.
Axar has represented to Cornerstone that it did not own, directly or indirectly, any equity or debt securities of the Hotel Fund prior to making the loan
contemplated by the Hotel Fund Loan Agreement and did not control and was not an affiliate of the Hotel Fund. Axar has also advised us that it does not own,
directly or indirectly, any equity or debt securities of the Hotel Fund other than through its participation in the mezzanine loan. At the time the trusts’
participation in the Hotel Fund Loan Agreement was being considered by Cornerstone, Axar had provided a draft of the Hotel Fund Loan Agreement to
Cornerstone which reflected that funds and other accounts affiliated with or managed by Axar also intended to participate in the loan facility on the same terms
and conditions as our trusts, but neither Cornerstone nor our trusts recognized that such participation represented a related party transaction, and Axar has
represented to us that it did not recognize that such participation represented a related party transaction. Consequently, neither the Board’s Trust and
Compliance Committee, as required by the Company’s investment policy, nor the Board’s Conflicts Committee, as required by its charter, had the opportunity to
review and to approve or disapprove the consummation by our trusts of the transactions contemplated by the Hotel Fund Loan Agreement.
On September 27, 2021, our trusts entered into an Assignment and Acceptance Agreement (the “Holdco Loan Assignment”) with an insurance holding company
(“Holdco”) and Holdco’s then current lender (the “Initial Lender”) pursuant to which the Initial Lender agreed to assign to our trusts all of its rights, duties and
obligations under a Loan Agreement dated as of July 9, 2019 between the Initial Lender and Holdco (the “Holdco Loan Agreement”). The Initial Lender had
previously declared Holdco in default under the terms of the Holdco Loan Agreement. At the closing of the transactions contemplated by the Holdco Loan
Assignment on October 6, 2021, our trusts paid the Initial Lender $28.7 million in cash, which equaled the then outstanding principal balance of the loan under
the Holdco Loan Agreement (the “Holdco Loan”). The Company was not affiliated with either Holdco or the Initial Lender and Axar has represented to
Cornerstone that it did not control and was not an affiliate of either Holdco or the Initial Lender. Also on September 27, 2021, our trusts and Holdco entered into
the First Amendment to Loan Agreement (the “Amended Holdco Loan Agreement”) pursuant to which, among other changes, the defaults asserted by the Initial
Lender were waived and the interest rate on the Holdco Loan was increased from 10%, all of which had been payable in kind by increasing the principal balance
of the loan, to 15%, of which 10% continued to be payable in kind and 5% was payable in cash. In addition, the Amended Holdco Loan Agreement accelerated
the maturity of the Holdco Loan to the earliest of the first anniversary of the closing (subject to a six month extension at the request of Holdco with the consent
of our trusts) and the occurrence of certain other events described further below. As of March 1, 2022, the interest rate on the Holdco Loan remained at 15%.
Through March 1, 2022, the trusts have received cash interest in the aggregate amount of $0.8 million on the Holdco Loan and additional interest in the form of
an increase in the principal balance of the Holdco Loan in the amount of $1.2 million, representing all interest payable to our trusts under the Amended Loan
Agreement.
Also on September 27, 2021, Axar entered into a letter agreement with Holdco (the “Transaction Letter Agreement”) pursuant to which Holdco agreed, in order
to induce Axar to enter into the Amended Holdco Loan Agreement, that it would, if requested by Axar, enter into an agreed-upon form of purchase agreement
for the sale of the outstanding capital stock of its wholly-owned insurance company subsidiary (the “Holdco Subsidiary”) to Axar for a purchase price of $100
million, subject to certain conditions including completion by Axar of a customary due diligence investigation and regulatory approval of the transaction by the
state insurance regulator. Recently, Axar advised us that the state insurance regulators had advised Axar that regulatory
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approval of the transaction between Axar and Holdco would not be granted because the contemplated purchase price included a $40 million note to be issued to
Holdco, and, as a result, after further negotiations, that Holdco and Axar entered into a purchase agreement dated January 20, 2022, which provided for a cash
purchase price of $75 million, less the outstanding amounts owed to our trusts under the Amended Holdco Loan Agreement and a fee that remained payable to
the Initial Lender. Axar has advised us that the sale to Axar under the purchase agreement remains subject to regulatory approval. Because the Holdco Loan is
secured by the stock of the Holdco Subsidiary, the Holdco Loan is required to be repaid in full upon the sale of the stock of the Holdco Subsidiary to Axar or any
third party.
The Amended Holdco Loan Agreement provides that the Holdco Loan is due and payable on the earliest of (a) October 6, 2022 (subject to a six-month extension
as discussed above), (b) an election by Holdco not to proceed with the transaction contemplated by the Transaction Letter Agreement, (c) a breach by Holdco of
any of its obligations under the Transaction Letter Agreement or any purchase agreement executed with respect to the sale of Holdco Subsidiary or (d) the
consummation of the sale of Holdco Subsidiary to Axar.
Also on September 27, 2021, (i) our trusts and Holdco entered into a letter agreement pursuant to which Holdco has paid our trusts a fee of $500,000 (the
“StoneMor Trusts Fee Letter Agreement”) and (ii) Axar and Holdco entered into an Expense Fee Letter pursuant to which Holdco agreed to pay Axar’s due
diligence expenses of up to $630,000 (the “Expense Fee Letter Agreement”). Entrance of Holdco into both the Expense Fee Letter Agreement and the StoneMor
Trusts Fee Letter Agreement were conditions to the effectiveness of the Amended Holdco Loan Agreement.
The Transaction Letter Agreement and the Expense Fee Letter Agreement were referenced in the Amended Holdco Loan Agreement. Although Axar as a
subadvisor to Cornerstone was obligated to disclose any conflicts of interest with respect to its recommendations, it did not provide a copy or disclose the terms
or provisions of the Transaction Letter Agreement or Expense Fee Letter Agreement to Cornerstone at the time it recommended that our trusts enter into the
Holdco Loan Assignment. As a result, at the time the Holdco Loan Assignment and the Amended Holdco Loan Agreement were executed, neither Cornerstone
nor our trusts was aware of Axar’s right to acquire Holdco Subsidiary from Holdco. Consequently, neither the Board’s Trust and Compliance Committee, as
required by the Company’s investment policy, nor the Board’s Conflicts Committee, as required by its charter, had the opportunity to review and to approve or
disapprove the consummation by our trusts of the transactions contemplated by the Holdco Loan Assignment and the Amended Holdco Loan Agreement.
Our management identified the Nevada Company and Hotel Fund transactions as related party transactions in February 2022 in connection with the preparation
of the Company’s consolidated financial statements for the fiscal year ended December 31, 2021. Upon management’s becoming aware of Axar’s interests in the
Nevada Company and Hotel Fund transactions, management reported such interests to the chairs of the Conflicts Committee and the Trust and Compliance
Committee, and upon Axar advising the Company of Axar’s involvement in the Holdco transaction, management reported it to the chair of the Conflicts
Committee.
Upon learning of Axar’s interests in the Nevada Company and Hotel Fund transactions, the Conflicts Committee promptly commenced an independent review
of all Axar’s investment recommendations to Cornerstone, including those trust investments in which Axar was involved, and directed its counsel to assist with
its review. Axar’s interests in the purchase of the Nevada Company Shares, the Real Estate Loan Participation, the Hotel Fund Transaction, the Holdco
transaction and certain other transactions were specifically reviewed and evaluated in March 2022 in connection with such review.
As a result of these findings, our management reconsidered the Company’s internal control over financial reporting and disclosure controls and procedures and
determined that those controls were not designed and thus did not operate effectively in the prior quarterly periods to allow us to identify related party
transactions that were required to be disclosed, which we determined to be a material weakness. For a further discussion of the ineffectiveness of the
Company’s disclosure controls and procedures and internal control over financial reporting, see Part II, Item 9A. Controls and Procedures. As part of its plan to
remediate this material weakness, Cornerstone now requires specific certifications from Axar with respect to any relationship or affiliation with or security
ownership position in any entity in whose securities any of Cornerstone’s subadvisors recommends our trusts invest, as well as specific disclosure by Axar of
any participation by Axar in any such investment. Cornerstone also intends to implement additional procedures regarding its review of recommendations by its
subadvisors, including a requirement for review and approval by a second officer of Cornerstone of any recommendations for investments over specified
amounts. As part of implementing such additional procedures, Cornerstone intends to conduct appropriate training for its employees with respect to these
procedures.
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Based on their respective inquiries regarding the trusts’ investment portfolio and Axar’s investment recommendations with respect thereto, neither our
management nor the Conflicts Committee is aware of any other related party transactions that would be required to be reported as “related party transactions” in
this Annual Report on Form 10-K. The Conflicts Committee is continuing its independent review of Axar’s investment recommendations to Cornerstone,
including those trust investments in which Axar was involved, to determine what additional action may be appropriate for Cornerstone and the Company to take
with respect thereto.
In December 2021, the Company reimbursed $0.2 million on behalf of Andrew Axelrod for certain expenses incurred by Mr. Axelrod in responding to a
document production request in the Fried v. Axelrod legal matter discussed above pursuant to the provisions of the Company’s bylaws. See Note 14
Commitments and Contingencies to our consolidated financial statements in Part II, Item 8. Financial Statements and Supplementary Data of this Annual
Report.
PARENTS OF SMALLER REPORTING COMPANIES
As a smaller reporting company, we are required to list all “parents” of the Company showing the basis of control and, as to each such parent, the percentage of
voting securities owned or other basis of control by its immediate parent. For this purpose, a “parent” is an affiliate that, directly or indirectly through one or
more intermediaries, controls an entity. The only person that we believe is or may be deemed to be a “parent” of the Company is Axar Capital Management, LP
based on (i) its ownership of 88,633,045, or approximately 74.9%, of our outstanding common stock and (ii) the fact that Andrew M. Axelrod, the Chairman of
our Board, is the sole member of the general partner of Axar Capital Management, LP.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees paid or accrued for professional services rendered by Grant Thornton LLP for the audit of our annual financial
statements for fiscal years 2021 and 2020 and audit-related services rendered by Grant Thornton LLP for fiscal years 2021 and 2020:
Years Ended December 31,
2021
2020
Audit fees
$
2,195,022
$
1,963,910
The category of “Audit fees” includes fees for our annual audit, quarterly reviews and services rendered in connection with regulatory filings with the SEC, such
as providing consents for our various registration statements.
All above audit services and audit-related services were pre-approved by the Audit Committee, which concluded that the provision of such services by Grant
Thornton LLP was compatible with the maintenance of each firm’s independence in the conduct of its auditing functions. The Audit Committee’s outside auditor
independence policy provides for pre-approval of all services performed by the outside auditors.
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PART IV
ITEM 15. EXHIBITS INDEX AND FINANCIAL STATEMENT SCHEDULES
(a)
Financial Statements
(1)
The following financial statements of StoneMor Inc. are included in Part II, Item 8. Financial Statements and Supplementary Data:
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Operations for the years ended December 31, 2021 and 2020
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2021 and 2020
Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020
Notes to Consolidated Financial Statements
(2)
Other schedules have not been included either because they are not applicable or because the information is included elsewhere in this Annual
Report on Form 10-K (the “Annual Report”).
(b)
The documents listed in the Exhibit Index of this Annual Report are filed with or incorporated by reference in this Annual Report, in each case as
indicated therein (numbered in accordance with Item 601 of Regulation S-K).
Incorporated by Reference
Exhibit
Number
Description
Form
Exhibit
Filing Date
3.1*
Certificate of Incorporation of StoneMor Inc.
8-K
3.1
December 31, 2019
3.2*
Certificate of Designation of Preferences, Rights and Limitations of Series A Preferred
Stock of StoneMor Inc.
10-K
3.2
April 7, 2020
3.3*
Certificate of Elimination of the Certificate of Designation of Preferred Stock of
StoneMor Inc.
10-Q
3.3
November 16, 2020
3.4*
Certificate of Amendment of the Certificate of Incorporation of StoneMor Inc.
10-Q
3.4
November 16, 2020
3.5*
Certificate of Amendment of the Certificate of Incorporation of StoneMor Inc.
10-Q
3.5
August 13, 2021
3.6*
Bylaws of StoneMor Inc.
8-K
3.2
December 31, 2019
4.1*
Description of Common Stock
10-K
4.9
April 7, 2020
4.2*
Indenture, dated as of May 11, 2021, by and among StoneMor Inc., the guarantors
named therein and Wilmington Trust, National Association, as trustee, including the
form of 8.500% Senior Secured Notes due 2029.
8-K
4.1
May 12, 2021
4.3*
Form of 8.500% Senior Secured Notes due 2029 (included in Exhibit 4.9 hereto).
8-K
4.2
May 12, 2021
4.4*
Security Agreement, dated as of May 11, 2021, by and among StoneMor Inc., the
guarantors named therein and Wilmington Trust, National Association, as collateral
agent.
8-K
4.3
May 12, 2021
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10.1*
Lease Agreement, dated as of September 26, 2013, by and among StoneMor
Operating, LLC, StoneMor Pennsylvania LLC and StoneMor Pennsylvania Subsidiary
LLC, the Archdiocese of Philadelphia, and StoneMor Partners L.P., solely in its
capacity as guarantor
8-K
10.1
October 2, 2013
10.2*
Amendment No. 1 to Lease Agreement, dated as of March 20, 2014, by and among
StoneMor Operating, LLC, StoneMor Pennsylvania LLC and StoneMor Pennsylvania
Subsidiary LLC, the Archdiocese of Philadelphia, and StoneMor Partners L.P., solely
in its capacity as guarantor
8-K
10.1
March 26, 2014
10.3*
Amendment No. 2 to Lease Agreement, dated as of May 28, 2014, by and among
StoneMor Operating, LLC, StoneMor Pennsylvania LLC, StoneMor Pennsylvania
Subsidiary LLC, the Archdiocese of Philadelphia, and StoneMor Partners L.P.
10-Q
10.3
August 8, 2014
10.4*
Registration Rights Agreement dated as of June 27, 2019 by and among StoneMor
Partners L.P., StoneMor GP LLC, SMP SPV LLC, Star V Partners LLC, Blackwell
Partners LLC –Series E, David Miller, MPF Investco 6, LLC, MPF Investco 7, LLC,
MPF Investco 8, LLC, The Mangrove Partners Fund, L.P. and The Mangrove Partners
Fund (Cayman Partnership), L.P.
8-K
10.2
June 28, 2019
10.5*
Registration Rights Agreement dated as of January 30, 2020 by and among StoneMor
Inc., American Cemeteries Infrastructure Investors, LLC, StoneMor GP Holdings,
LLC and certain funds and managed accounts for which Axar Capital Management,
LP serves as investment manager
8-K
10.1
February 4, 2020
10.6*
Amendment to Registration Rights Agreement dated as of June 19, 2020 by and
among StoneMor Inc., American Cemeteries Infrastructure Investors, LLC, StoneMor
GP Holdings, LLC and certain funds and managed accounts for which Axar Capital
Management, LP serves as investment manager
8-K
10.1
June 25, 2020
10.7*
Asset Sale Agreement dated as of December 4, 2019 by and among Carriage Funeral
Holdings, Inc., StoneMor California Subsidiary, Inc. and StoneMor California, Inc.
8-K
2.1
December 5, 2019
10.8*
Series A Preferred Unit Purchase Agreement dated as of June 27, 2019 by and among
StoneMor Partners L.P., SMP SPV LLC, Star V Partners LLC, Blackwell Partners
LLC –Series E, David Miller, MPF Investco 6, LLC, MPF Investco 7, LLC, MPF
Investco 8, LLC, The Mangrove Partners Fund, L.P. and The Mangrove Partners Fund
(Cayman Partnership), L.P.
8-K
10.1
June 28, 2019
10.9*
Nomination and Director Voting Agreement dated as of September 27, 2018 by and
among StoneMor GP LLC, Axar Capital Management, LP, Axar GP, LLC, Axar
Master Fund, Ltd., StoneMor GP Holdings, LLC and Robert B. Hellman, Jr., as trustee
under the Voting and Investment Trust Agreement for the benefit of American
Cemeteries Infrastructure Investors LLC.
10-K
10.10
April 7, 2020
10.10*
First Amendment to Nomination and Director Voting Agreement dated as of February
4, 2019 by and among StoneMor GP LLC, Axar Capital Management, LP, Axar GP,
LLC, Axar Master Fund, Ltd., StoneMor GP Holdings, LLC and Robert B. Hellman,
Jr., as trustee under the Voting and Investment Trust Agreement for the benefit of
American Cemeteries Infrastructure Investors LLC.
10-K
10.11
April 7, 2020
116
Table of Contents
10.11*
Second Amendment to Nomination and Director Voting Agreement dated as of June
27. 2019 by and among StoneMor GP LLC, Axar Capital Management, LP, Axar GP,
LLC, Axar Master Fund, Ltd., StoneMor GP Holdings, LLC and Robert B. Hellman,
Jr., as trustee under the Voting and Investment Trust Agreement for the benefit of
American Cemeteries Infrastructure Investors LLC.
10-K
10.12
April 7, 2020
10.12*
Third Amendment to Nomination and Director Voting Agreement dated as of
November 3, 2020 by and among StoneMor GP LLC, Axar Capital Management, LP,
Axar GP, LLC, Axar Master Fund, Ltd., StoneMor GP Holdings, LLC and Robert B.
Hellman, Jr., as trustee under the Voting and Investment Trust Agreement for the
benefit of American Cemeteries Infrastructure Investors LLC
8-K
2.2
November 9, 2020
10.13*
Fourth Amendment to Nomination and Director Voting Agreement dated as of
November 20. 2020 by and among StoneMor GP LLC, Axar Capital Management, LP,
Axar GP, LLC, Axar Master Fund, Ltd., StoneMor GP Holdings, LLC and Robert B.
Hellman, Jr., as trustee under the Voting and Investment Trust Agreement for the
benefit of American Cemeteries Infrastructure Investors LLC
8-K
2.2
November 23, 2020
10.14*
Fifth Amendment to Nomination and Director Voting Agreement dated as of April 13.
2021 by and among StoneMor Inc., Axar Capital Management, LP, Axar GP, LLC,
Axar Master Fund, Ltd., StoneMor GP Holdings, LLC and Robert B. Hellman, Jr., as
trustee under the Voting and Investment Trust Agreement for the benefit of American
Cemeteries Infrastructure Investors LLC.
8-K
2.2
April 15, 2021
10.15†*
Form of Indemnification Agreement by and between StoneMor GP LLC and
Lawrence Miller, Robert B. Hellman, Jr., Fenton R. Talbott, Martin R. Lautman,
William Shane, Allen R. Freedman, effective September 20, 2004
10-Q
10.9
November 15, 2004
10.16†*
Form of Indemnification Agreement by and between StoneMor GP LLC and Howard
Carver and Peter Grunebaum, effective February 16, 2007
10-Q
10.9
November 15, 2004
10.17†*
Form of Indemnification Agreement by and between StoneMor GP LLC and Leo J.
Pound and Jonathan Contos, dated February 26, 2015
10-Q
10.1
May 8, 2015
10.18†*
Indemnification Agreement, dated May 16, 2017, by and between StoneMor GP LLC
and R. Paul Grady
8-K
10.2
May 22, 2017
10.19†*
Indemnification Agreement, effective May 16, 2017, by and between StoneMor GP
LLC and Mark Miller
8-K
10.4
May 22, 2017
10.20†*
Indemnification Agreement, effective May 16, 2017, by and between StoneMor GP
LLC and Robert A. Sick
8-K
10.5
May 22, 2017
10.21†*
Indemnification Agreement effective June 15, 2018 by and between StoneMor GP
LLC and Patricia Wellenbach
8-K
10.6
June 18, 2018
10.22†*
Indemnification Agreement effective June 15, 2018 by and between StoneMor GP
LLC and Stephen J. Negrotti
8-K
10.7
June 18, 2018
10.23†*
Indemnification Agreement effective July 16, 2019 by and between StoneMor GP
LLC and Andrew M. Axelrod
8-K
10.8
July 22, 2019
10.24†*
Indemnification Agreement effective July 16, 2019 by and between StoneMor GP
LLC and Spencer E. Goldenberg
8-K
10.9
July 22, 2019
10.25†*
Indemnification Agreement effective July 16, 2019 by and between StoneMor GP
LLC and David Miller
8-K
10.10
July 22, 2019
117
Table of Contents
10.26†*
Form of StoneMor Inc. Indemnification Agreement
8-K
10.1
December 31, 2019
10.27†*
Employment Agreement by and between Joseph M. Redling and StoneMor GP LLC,
dated June 29, 2018
8-K
10.1
July 3, 2018
10.28†*
Employment Agreement dated September 19, 2019 by and between StoneMor GP
LLC and Jeffrey DiGiovanni
8-K
10.3
September 19, 2019
10.29†*
Employment Agreement by and between Austin K. So and StoneMor GP LLC, dated
June 15, 2018
8-K
10.3
June 18, 2018
10.30†*
StoneMor Amended and Restated 2019 Long-Term Incentive Plan
8-K
10.1
April 2, 2019
10.31†*
First Amendment to the StoneMor Amended and Restated 2019 Long-Term Incentive
Plan
8-K
10.1
December 20, 2019
10.32†*
Second Amendment to the StoneMor Amended and Restated 2019 Long-Term
Incentive Plan
8-K
10.1
May 11, 2020
10.33†
Third Amendment to the StoneMor Amended and Restated 2019 Long-Term Incentive
Plan
10.34†*
Director Restricted Phantom Unit Agreement by and between StoneMor GP LLC and
Andrew M. Axelrod
8-K
10.5
July 22, 2019
10.35†*
Amendment to Director Restricted Phantom Unit Agreement dated November 7, 2019
by and between StoneMor GP LLC and Andrew M. Axelrod
10-K
10.31
April 7, 2020
10.36†*
Director Restricted Phantom Unit Agreement by and between StoneMor GP LLC and
Spencer E. Goldenberg
8-K
10.6
July 22, 2019
10.37†
Amendment to Director Restricted Phantom Unit Agreement by and between
StoneMor GP LLC and Spencer E. Goldenberg
10-K
10.35
March 25, 2021
10.38†*
Director Restricted Phantom Unit Agreement by and between StoneMor GP LLC and
David Miller
8-K
10.7
July 22, 2019
10.39†
Amendment to Director Restricted Phantom Unit Agreement dated December 15,
2021 by and between StoneMor Inc. and David Miller
10.40†*
Director Restricted Phantom Unit Agreement effective June 15, 2018 by and between
StoneMor GP LLC and Stephen J. Negrotti
8-K
10.5
June 18, 2018
10.41†
Amendment to Director Restricted Phantom Unit Agreement dated December 15,
2021 by and between StoneMor Inc. and Stephen J. Negrotti
10.42†*
Director Restricted Phantom Unit Agreement effective June 15, 2018 by and between
StoneMor GP LLC and Patricia D. Wellenbach
8-K
10.4
June 18, 2018
10.43†
Amendment to Director Restricted Phantom Unit Agreement dated December 15,
2021 by and between StoneMor Inc. and Patricia D. Wellenbach
10.44†*
Executive Restricted Unit Award Agreement dated July 18, 2018 by and between
StoneMor GP LLC and Joseph M. Redling
8-K
10.1
July 24, 2018
10.45†*
Form of StoneMor Amended and Restated 2019 Long-Term Incentive Plan Option
Agreement
10-K
10.37
April 7, 2020
10.46†*
Form of StoneMor Amended and Restated 2019 Long Term Incentive Plan Option
Agreement (Stock)
10-K
10.41
March 25, 2021
10.47†*
Form of StoneMor Amended and Restated 2019 Long-Term Incentive Plan Restricted
Stock Award Agreement
10-K
10.42
March 25, 2021
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10.48†*
Director Restricted Phantom Unit Agreement dated December 4, 2020 by and between
StoneMor Inc. and Kevin D. Patrick
10-K
10.43
March 25, 2021
10.49†
Amendment to Director Restricted Phantom Unit Agreement dated December 15,
2021 by and between StoneMor Inc. and Kevin D. Patrick
10.50*
Asset Sale Agreement dated as of December 4, 2019 by and among Carriage Funeral
Holdings, Inc., StoneMor California Subsidiary, Inc. and StoneMor California, Inc.
8-K
2.1
December 5, 2019
10.51*
Asset Sale Agreement dated as of November 6, 2020 by and among Clearstone
Memorial Partners, LLC, StoneMor Oregon LLC, StoneMor Oregon Subsidiary LLC
and StoneMor Washington, Inc.
8-K
2.1
November 9, 2020
10.52*
Letter Agreement dated April 1, 2020 by and between Axar Capital Management, LP
and StoneMor Inc.
8-K
10.1
April 2, 2020
10.53*
Series A Preferred Stock Purchase Agreement dated April 3, 2020 by and among
StoneMor, Inc., Axar CL SPV LLC, Star V Partners LLC and Blackwell Partners LLC
–Series E
10-K
10.45
April 7, 2020
10.54*
Master Services Agreement (Unionized Locations) dated April 2, 2020 by and
between StoneMor Operating LLC and Rickert Landscaping, Inc.
10-K
10.46
April 7, 2020
10.55*
Master Services Agreement dated April 2, 2020 by and between StoneMor Operating
LLC and Moon Landscaping, Inc.
10-K
10.47
April 7, 2020
10.56*
Common Stock Purchase Agreement dated May 27, 2020 by and among StoneMor
Inc., Axar Capital Management, LP and the accounts set forth or to be set forth on
Schedule A or Schedule B thereto
8-K
10.1
May 28, 2020
10.57*
Letter Agreement dated as of November 19, 2020 by and among StoneMor GP LLC,
Axar Capital Management, LP, Axar GP, LLC, Axar Master Fund, Ltd., StoneMor GP
Holdings, LLC and Robert B. Hellman, Jr., as trustee under the Voting and Investment
Trust Agreement for the benefit of American Cemeteries Infrastructure Investors LLC
8-K
2.1
November 23, 2020
10.58*
Subadvisor Agreement dated as of February 1, 2021 by and between Cornerstone
Trust Management Services, LLC and Axar Capital Management, LP.
8-K
10.1
February 2, 2021
10.59*
Letter Agreement dated as of April 13, 2021 by and among StoneMor Inc., Axar
Capital Management, LP, Axar GP, LLC, Axar Master Fund, Ltd., StoneMor GP
Holdings, LLC and Robert B. Hellman, Jr., as trustee under the Voting and Investment
Trust Agreement for the benefit of American Cemeteries Infrastructure Investors LLC.
8-K
2.1
April 15, 2021
21.1
Subsidiaries of Registrant
23.1
Consent of Grant Thornton LLP
31.1
Certification pursuant to Exchange Act Rule 13a-14(a) of Joseph M. Redling,
President and Chief Executive Officer
31.2
Certification pursuant to Exchange Act Rule 13a-14(a) of Jeffrey DiGiovanni, Chief
Financial Officer and Senior Vice President
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Table of Contents
32.1
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §
1350) and Exchange Act Rule 13a-14(b) of Joseph M. Redling, President and Chief
Executive Officer
32.2
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §
1350) and Exchange Act Rule 13a-14(b) of Jeffrey DiGiovanni, Chief Financial
Officer and Senior Vice President
101.INS
Inline XBRL Instance Document - the instance document does not appear in the
Interactive Data File because its XBRL tags are embedded within the Inline XBRL
document.
101.SCH
Inline XBRL Taxonomy Extension Schema Documents.
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit
101)
* Incorporated by reference, as indicated
† Management contract, compensatory plan or arrangement
ITEM 16. FORM 10-K SUMMARY
Not applicable.
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Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
STONEMOR INC.
March 31, 2022
By:
/s/ Joseph M. Redling
Joseph M. Redling
President and Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Signatures
Title
Date
/s/ Joseph M. Redling
President and Chief Executive Officer and Director
March 31, 2022
Joseph M. Redling
(Principal Executive Officer)
/s/ Jeffrey DiGiovanni
Senior Vice President and Chief Financial Officer
March 31, 2022
Jeffrey DiGiovanni
(Principal Financial and Accounting Officer)
/s/ Andrew Axelrod
Chairman of the Board
March 31, 2022
Andrew Axelrod
/s/ Spender Goldenberg
Director
March 31, 2022
Spencer Goldenberg
/s/ David Miller
Director
March 31, 2022
David Miller
/s/ Stephen J. Negrotti
Director
March 31, 2022
Stephen J. Negrotti
/s/ Kevin D. Patrick
Director
March 31, 2022
Kevin D. Patrick
/s/ Patricia D. Wellenbach
Director
March 31, 2022
Patricia D. Wellenbach
121
Exhibit 10.33
THIRD AMENDMENT TO THE
STONEMOR AMENDED AND RESTATED
2019 LONG-TERM INCENTIVE PLAN
THIS THIRD AMENDMENT (the “Third Amendment”) to the StoneMor Amended and Restated 2019 Long-Term Incentive
Plan, as amended from time to time (the “Plan”), has been adopted by StoneMor Inc., a Delaware corporation (the “Company”).
Capitalized terms used but not defined herein shall have the meanings assigned to them in the Plan.
W I T N E S E T H:
WHEREAS, the Company previously adopted the Plan;
WHEREAS, Section 7(a) of the Plan provides that the board of directors of the Company (the “Board”) or the Compensation,
Nominating and Governance Committee of the Board (the “Committee”) may amend the Plan from time to time without the consent
of any other person except as required by applicable law or the rules of the principal securities exchange, if any, on which the Units
are traded; and
WHEREAS, the Committee now desires to amend the Plan to delete the second sentence of Section 8(b).
NOW, THEREFORE, the Plan is hereby amended as set forth below:
The second sentence of Section 8(b) of the Plan is hereby deleted.
- 1 -
EXHIBIT 10.39
AMENDMENT TO
DIRECTOR RESTRICTED PHANTOM UNIT AGREEMENT
UNDER
STONEMOR AMENDED AND RESTATED 2019 LONG-TERM INCENTIVE PLAN
This Amendment to Director Restricted Phantom Unit Agreement (the “Amendment”) dated this _15th_ day of December, 2021
is made by and between StoneMor Inc., a Delaware corporation (the “Company”) and David Miller, a director of the Company (the
“Participant”).
BACKGROUND:
The Company and the Participant are currently parties to a Director Restricted Phantom Unit Agreement dated July 16, 2019 (the
“Original Agreement”) pursuant to which the Participant has elected to defer a portion of the compensation payable to the Participant
for service as a director and to credit such amounts in the form of Phantom Units under the StoneMor Amended and Restated 2019
Long-Term Incentive Plan, as amended (the “Plan”) to a mandatory deferred compensation account established by the Company for
the Participant. The parties now desire to amend the Original Agreement to increase the amount of future deferrals for all periods
after December 31, 2021.
NOW, THEREFORE, the Company and the Participant, each intending to be legally bound hereby, agree as follows:
ARTICLE I
AMENDMENT
I.1Amendment of Original Agreement. Section 1.1 of the Original Agreement is hereby amended and restated to read in its entirety
as follows:
“1.1 Creation of Mandatory Deferred Compensation Account. Commencing on January 1, 2022, compensation in the annual
amount of $50,000 (“Annual Deferral”) payable to the Participant in consideration for service as a Director shall be deferred and
credited, in the form of Phantom Units, to a mandatory deferred compensation account (the “Mandatory Deferred Compensation
Account”) established by the Company for the Participant.”
ARTICLE II
GENERAL PROVISIONS
II.1Administration. Pursuant to the Plan, the Committee is vested with conclusive authority to interpret and construe the Plan, to
adopt rules and regulations for carrying out the Plan, and to make determinations with respect to all matters relating to this
Amendment, the Plan and awards made pursuant thereto. The authority to manage and control the operation and administration of this
Amendment shall be likewise vested in the Committee, and the Committee shall have all powers with respect to this Amendment as it
has with respect to the Plan. Any interpretation of this Amendment by the Committee, and any decision made by the Committee with
respect to this Amendment, shall be final and binding.
1
II.2Effect of Plan; Construction. The entire text of the Plan is expressly incorporated herein by this reference and so forms a part of
this Amendment. In the event of any inconsistency or discrepancy between the provisions of this Amendment and the terms and
conditions of the Plan, the provisions of the Plan shall govern and prevail. This Amendment is subject in all respects to, and the
Company and the Participant each hereby agree to be bound by, all of the terms and conditions of the Plan, as the same may have
been amended from time to time in accordance with its terms; provided, however, that no such amendment shall deprive the
Participant, without the Participant’s consent, of any rights earned or otherwise due to the Participant hereunder.
II.3Amendment or Supplement. This Amendment shall not be amended or supplemented except by an instrument in writing executed
by both parties to this Amendment, without the consent of any other person, as of the effective date of such amendment or
supplement.
II.4Captions. The captions at the beginning of each of the numbered Sections and Articles herein are for reference purposes only and
will have no legal force or effect. Such captions will not be considered a part of this Amendment for purposes of interpreting,
construing or applying this Amendment and will not define, limit, extend, explain or describe the scope or extent of this Amendment
or any of its terms and conditions.
II.5Governing Law. THE VALIDITY, CONSTRUCTION, INTERPRETATION AND EFFECT OF THIS AMENDMENT SHALL
EXCLUSIVELY BE GOVERNED BY AND DETERMINED IN ACCORDANCE WITH THE LAW OF THE COMMONWEALTH
OF PENNSYLVANIA (WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAW PRINCIPLES THEREOF), EXCEPT TO
THE EXTENT PREEMPTED BY FEDERAL LAW, WHICH SHALL GOVERN.
II.6Entire Agreement. The Original Agreement, as amended by this Amendment, constitutes the entire understanding and supersedes
any and all other agreements, oral or written, between the parties hereto, in respect of the subject matter of the Original Agreement or
this Amendment, and embodies the entire understanding of the parties with respect to the subject matter hereof.
II.7Acceptance of Terms. The terms and conditions of this Amendment shall be binding upon the estate, heirs, beneficiaries and other
successors in interest of the Participant to the same extent that said terms and conditions are binding upon the Participant.
II.8Arbitration. Any dispute or disagreement between Participant and the Company with respect to any portion of this Amendment or
its validity, construction, meaning, performance, or Participant’s rights hereunder shall be settled by arbitration, conducted in
Philadelphia, Pennsylvania, in accordance with the Commercial Arbitration Rules of the American Arbitration Association or its
successor, as amended from time to time. However, prior to submission to arbitration the Participant will attempt to resolve any
disputes or disagreements with the Company over this Amendment amicably and informally, in good faith, for a period not to exceed
two weeks. Thereafter, the dispute or disagreement will be submitted to arbitration. At any time prior to a decision from the
arbitrator(s) being rendered, the Participant and the Company may resolve the dispute by settlement. The Participant and the
Company shall equally share the costs charged by the American Arbitration Association or its successor, but the Participant and the
Company shall otherwise be solely responsible for their own respective
2
counsel fees and expenses. The decision of the arbitrator(s) shall be made in writing, setting forth the award, the reasons for the
decision and award and shall be binding and conclusive on the Participant and the Company. Further, neither Participant nor the
Company shall appeal any such award. Judgment of a court of competent jurisdiction may be entered upon the award and may be
enforced as such in accordance with the provisions of the award.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound hereby, have executed this Amendment as of the
day first above written.
STONEMOR INC.
By:
/s/ Austin K. So
Austin K. So
Senior Vice President, Chief
Legal Officer and Secretary
/s/ David Miller
David Miller
3
EXHIBIT 10.41
AMENDMENT TO
DIRECTOR RESTRICTED PHANTOM UNIT AGREEMENT
UNDER
STONEMOR AMENDED AND RESTATED 2019 LONG-TERM INCENTIVE PLAN
This Amendment to Director Restricted Phantom Unit Agreement (the “Amendment”) dated this _15th_ day of December, 2021
is made by and between StoneMor Inc., a Delaware corporation (the “Company”) and Stephen J. Negrotti, a director of the Company
(the “Participant”).
BACKGROUND:
The Company and the Participant are currently parties to a Director Restricted Phantom Unit Agreement dated June 15, 2018
(the “Original Agreement”) pursuant to which the Participant has elected to defer a portion of the compensation payable to the
Participant for service as a director and to credit such amounts in the form of Phantom Units under the StoneMor Amended and
Restated 2019 Long-Term Incentive Plan, as amended (the “Plan”) to a mandatory deferred compensation account established by the
Company for the Participant. The parties now desire to amend the Original Agreement to increase the amount of future deferrals for
all periods after December 31, 2021.
NOW, THEREFORE, the Company and the Participant, each intending to be legally bound hereby, agree as follows:
ARTICLE I
AMENDMENT
I.1Amendment of Original Agreement. Section 1.1 of the Original Agreement is hereby amended and restated to read in its entirety
as follows:
“1.1 Creation of Mandatory Deferred Compensation Account. Commencing on January 1, 2022, compensation in the annual
amount of $50,000 (“Annual Deferral”) payable to the Participant in consideration for service as a Director shall be deferred and
credited, in the form of Phantom Units, to a mandatory deferred compensation account (the “Mandatory Deferred Compensation
Account”) established by the Company for the Participant.”
ARTICLE II
GENERAL PROVISIONS
II.1Administration. Pursuant to the Plan, the Committee is vested with conclusive authority to interpret and construe the Plan, to
adopt rules and regulations for carrying out the Plan, and to make determinations with respect to all matters relating to this
Amendment, the Plan and awards made pursuant thereto. The authority to manage and control the operation and administration of this
Amendment shall be likewise vested in the Committee, and the Committee shall have all powers with respect to this Amendment as it
has with respect to the Plan. Any interpretation of
1
this Amendment by the Committee, and any decision made by the Committee with respect to this Amendment, shall be final and
binding.
II.2Effect of Plan; Construction. The entire text of the Plan is expressly incorporated herein by this reference and so forms a part of
this Amendment. In the event of any inconsistency or discrepancy between the provisions of this Amendment and the terms and
conditions of the Plan, the provisions of the Plan shall govern and prevail. This Amendment is subject in all respects to, and the
Company and the Participant each hereby agree to be bound by, all of the terms and conditions of the Plan, as the same may have
been amended from time to time in accordance with its terms; provided, however, that no such amendment shall deprive the
Participant, without the Participant’s consent, of any rights earned or otherwise due to the Participant hereunder.
II.3Amendment or Supplement. This Amendment shall not be amended or supplemented except by an instrument in writing executed
by both parties to this Amendment, without the consent of any other person, as of the effective date of such amendment or
supplement.
II.4Captions. The captions at the beginning of each of the numbered Sections and Articles herein are for reference purposes only and
will have no legal force or effect. Such captions will not be considered a part of this Amendment for purposes of interpreting,
construing or applying this Amendment and will not define, limit, extend, explain or describe the scope or extent of this Amendment
or any of its terms and conditions.
II.5Governing Law. THE VALIDITY, CONSTRUCTION, INTERPRETATION AND EFFECT OF THIS AMENDMENT SHALL
EXCLUSIVELY BE GOVERNED BY AND DETERMINED IN ACCORDANCE WITH THE LAW OF THE COMMONWEALTH
OF PENNSYLVANIA (WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAW PRINCIPLES THEREOF), EXCEPT TO
THE EXTENT PREEMPTED BY FEDERAL LAW, WHICH SHALL GOVERN.
II.6Entire Agreement. The Original Agreement, as amended by this Amendment, constitutes the entire understanding and supersedes
any and all other agreements, oral or written, between the parties hereto, in respect of the subject matter of the Original Agreement or
this Amendment, and embodies the entire understanding of the parties with respect to the subject matter hereof.
II.7Acceptance of Terms. The terms and conditions of this Amendment shall be binding upon the estate, heirs, beneficiaries and other
successors in interest of the Participant to the same extent that said terms and conditions are binding upon the Participant.
II.8Arbitration. Any dispute or disagreement between Participant and the Company with respect to any portion of this Amendment or
its validity, construction, meaning, performance, or Participant’s rights hereunder shall be settled by arbitration, conducted in
Philadelphia, Pennsylvania, in accordance with the Commercial Arbitration Rules of the American Arbitration Association or its
successor, as amended from time to time. However, prior to submission to arbitration the Participant will attempt to resolve any
disputes or disagreements with the Company over this Amendment amicably and informally, in good faith, for a period not to exceed
two weeks. Thereafter, the dispute or disagreement will be submitted to arbitration. At any time prior to a decision from the
arbitrator(s) being rendered, the Participant and the
2
Company may resolve the dispute by settlement. The Participant and the Company shall equally share the costs charged by the
American Arbitration Association or its successor, but the Participant and the Company shall otherwise be solely responsible for their
own respective counsel fees and expenses. The decision of the arbitrator(s) shall be made in writing, setting forth the award, the
reasons for the decision and award and shall be binding and conclusive on the Participant and the Company. Further, neither
Participant nor the Company shall appeal any such award. Judgment of a court of competent jurisdiction may be entered upon the
award and may be enforced as such in accordance with the provisions of the award.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound hereby, have executed this Amendment as of the
day first above written.
STONEMOR INC.
By:
/s/ Austin K. So
Austin K. So
Senior Vice President, Chief
Legal Officer and Secretary
/s/ Stephen J. Negrotti
Stephen J. Negrotti
3
EXHIBIT 10.43
AMENDMENT TO
DIRECTOR RESTRICTED PHANTOM UNIT AGREEMENT
UNDER
STONEMOR AMENDED AND RESTATED 2019 LONG-TERM INCENTIVE PLAN
This Amendment to Director Restricted Phantom Unit Agreement (the “Amendment”) dated this _15th_ day of December, 2021
is made by and between StoneMor Inc., a Delaware corporation (the “Company”) and Patricia D. Wellenbach, a director of the
Company (the “Participant”).
BACKGROUND:
The Company and the Participant are currently parties to a Director Restricted Phantom Unit Agreement dated June 15, 2018
(the “Original Agreement”) pursuant to which the Participant has elected to defer a portion of the compensation payable to the
Participant for service as a director and to credit such amounts in the form of Phantom Units under the StoneMor Amended and
Restated 2019 Long-Term Incentive Plan, as amended (the “Plan”) to a mandatory deferred compensation account established by the
Company for the Participant. The parties now desire to amend the Original Agreement to increase the amount of future deferrals for
all periods after December 31, 2021.
NOW, THEREFORE, the Company and the Participant, each intending to be legally bound hereby, agree as follows:
ARTICLE I
AMENDMENT
I.1Amendment of Original Agreement. Section 1.1 of the Original Agreement is hereby amended and restated to read in its entirety
as follows:
“1.1 Creation of Mandatory Deferred Compensation Account. Commencing on January 1, 2022, compensation in the annual
amount of $40,000 (“Annual Deferral”) payable to the Participant in consideration for service as a Director shall be deferred and
credited, in the form of Phantom Units, to a mandatory deferred compensation account (the “Mandatory Deferred Compensation
Account”) established by the Company for the Participant.”
ARTICLE II
GENERAL PROVISIONS
II.1Administration. Pursuant to the Plan, the Committee is vested with conclusive authority to interpret and construe the Plan, to
adopt rules and regulations for carrying out the Plan, and to make determinations with respect to all matters relating to this
Amendment, the Plan and awards made pursuant thereto. The authority to manage and control the operation and administration of this
Amendment shall be likewise vested in the Committee, and the Committee shall have all powers with respect to this Amendment as it
has with respect to the Plan. Any interpretation of
1
this Amendment by the Committee, and any decision made by the Committee with respect to this Amendment, shall be final and
binding.
II.2Effect of Plan; Construction. The entire text of the Plan is expressly incorporated herein by this reference and so forms a part of
this Amendment. In the event of any inconsistency or discrepancy between the provisions of this Amendment and the terms and
conditions of the Plan, the provisions of the Plan shall govern and prevail. This Amendment is subject in all respects to, and the
Company and the Participant each hereby agree to be bound by, all of the terms and conditions of the Plan, as the same may have
been amended from time to time in accordance with its terms; provided, however, that no such amendment shall deprive the
Participant, without the Participant’s consent, of any rights earned or otherwise due to the Participant hereunder.
II.3Amendment or Supplement. This Amendment shall not be amended or supplemented except by an instrument in writing executed
by both parties to this Amendment, without the consent of any other person, as of the effective date of such amendment or
supplement.
II.4Captions. The captions at the beginning of each of the numbered Sections and Articles herein are for reference purposes only and
will have no legal force or effect. Such captions will not be considered a part of this Amendment for purposes of interpreting,
construing or applying this Amendment and will not define, limit, extend, explain or describe the scope or extent of this Amendment
or any of its terms and conditions.
II.5Governing Law. THE VALIDITY, CONSTRUCTION, INTERPRETATION AND EFFECT OF THIS AMENDMENT SHALL
EXCLUSIVELY BE GOVERNED BY AND DETERMINED IN ACCORDANCE WITH THE LAW OF THE COMMONWEALTH
OF PENNSYLVANIA (WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAW PRINCIPLES THEREOF), EXCEPT TO
THE EXTENT PREEMPTED BY FEDERAL LAW, WHICH SHALL GOVERN.
II.6Entire Agreement. The Original Agreement, as amended by this Amendment, constitutes the entire understanding and supersedes
any and all other agreements, oral or written, between the parties hereto, in respect of the subject matter of the Original Agreement or
this Amendment, and embodies the entire understanding of the parties with respect to the subject matter hereof.
II.7Acceptance of Terms. The terms and conditions of this Amendment shall be binding upon the estate, heirs, beneficiaries and other
successors in interest of the Participant to the same extent that said terms and conditions are binding upon the Participant.
II.8Arbitration. Any dispute or disagreement between Participant and the Company with respect to any portion of this Amendment or
its validity, construction, meaning, performance, or Participant’s rights hereunder shall be settled by arbitration, conducted in
Philadelphia, Pennsylvania, in accordance with the Commercial Arbitration Rules of the American Arbitration Association or its
successor, as amended from time to time. However, prior to submission to arbitration the Participant will attempt to resolve any
disputes or disagreements with the Company over this Amendment amicably and informally, in good faith, for a period not to exceed
two weeks. Thereafter, the dispute or disagreement will be submitted to arbitration. At any time prior to a decision from the
arbitrator(s) being rendered, the Participant and the
2
Company may resolve the dispute by settlement. The Participant and the Company shall equally share the costs charged by the
American Arbitration Association or its successor, but the Participant and the Company shall otherwise be solely responsible for their
own respective counsel fees and expenses. The decision of the arbitrator(s) shall be made in writing, setting forth the award, the
reasons for the decision and award and shall be binding and conclusive on the Participant and the Company. Further, neither
Participant nor the Company shall appeal any such award. Judgment of a court of competent jurisdiction may be entered upon the
award and may be enforced as such in accordance with the provisions of the award.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound hereby, have executed this Amendment as of the
day first above written.
STONEMOR INC.
By:
/s/ Austin K. So
Austin K. So
Senior Vice President, Chief
Legal Officer and Secretary
/s/ Patricia D. Wellenbach
Patricia D. Wellenbach
3
EXHIBIT 10.49
AMENDMENT TO
DIRECTOR RESTRICTED PHANTOM UNIT AGREEMENT
UNDER
STONEMOR AMENDED AND RESTATED 2019 LONG-TERM INCENTIVE PLAN
This Amendment to Director Restricted Phantom Unit Agreement (the “Amendment”) dated this 15th day of December, 2021 is
made by and between StoneMor Inc., a Delaware corporation (the “Company”) and Kevin D. Patrick, a director of the Company (the
“Participant”).
BACKGROUND:
The Company and the Participant are currently parties to a Director Restricted Phantom Unit Agreement dated July 16, 2019 (the
“Original Agreement”) pursuant to which the Participant has elected to defer a portion of the compensation payable to the Participant
for service as a director and to credit such amounts in the form of Phantom Units under the StoneMor Amended and Restated 2019
Long-Term Incentive Plan, as amended (the “Plan”) to a mandatory deferred compensation account established by the Company for
the Participant. The parties now desire to amend the Original Agreement to increase the amount of future deferrals for all periods
after December 31, 2021.
NOW, THEREFORE, the Company and the Participant, each intending to be legally bound hereby, agree as follows:
ARTICLE I
AMENDMENT
I.1Amendment of Original Agreement. Section 1.1 of the Original Agreement is hereby amended and restated to read in its entirety
as follows:
“1.1 Creation of Mandatory Deferred Compensation Account. Commencing on January 1, 2022, compensation in the annual
amount of $30,000 (“Annual Deferral”) payable to the Participant in consideration for service as a Director shall be deferred and
credited, in the form of Phantom Units, to a mandatory deferred compensation account (the “Mandatory Deferred Compensation
Account”) established by the Company for the Participant.”
ARTICLE II
GENERAL PROVISIONS
II.1Administration. Pursuant to the Plan, the Committee is vested with conclusive authority to interpret and construe the Plan, to
adopt rules and regulations for carrying out the Plan, and to make determinations with respect to all matters relating to this
Amendment, the Plan and awards made pursuant thereto. The authority to manage and control the operation and administration of this
Amendment shall be likewise vested in the Committee, and the Committee shall have all powers with respect to this Amendment as it
has with respect to the Plan. Any interpretation of
1
this Amendment by the Committee, and any decision made by the Committee with respect to this Amendment, shall be final and
binding.
II.2Effect of Plan; Construction. The entire text of the Plan is expressly incorporated herein by this reference and so forms a part of
this Amendment. In the event of any inconsistency or discrepancy between the provisions of this Amendment and the terms and
conditions of the Plan, the provisions of the Plan shall govern and prevail. This Amendment is subject in all respects to, and the
Company and the Participant each hereby agree to be bound by, all of the terms and conditions of the Plan, as the same may have
been amended from time to time in accordance with its terms; provided, however, that no such amendment shall deprive the
Participant, without the Participant’s consent, of any rights earned or otherwise due to the Participant hereunder.
II.3Amendment or Supplement. This Amendment shall not be amended or supplemented except by an instrument in writing executed
by both parties to this Amendment, without the consent of any other person, as of the effective date of such amendment or
supplement.
II.4Captions. The captions at the beginning of each of the numbered Sections and Articles herein are for reference purposes only and
will have no legal force or effect. Such captions will not be considered a part of this Amendment for purposes of interpreting,
construing or applying this Amendment and will not define, limit, extend, explain or describe the scope or extent of this Amendment
or any of its terms and conditions.
II.5Governing Law. THE VALIDITY, CONSTRUCTION, INTERPRETATION AND EFFECT OF THIS AMENDMENT SHALL
EXCLUSIVELY BE GOVERNED BY AND DETERMINED IN ACCORDANCE WITH THE LAW OF THE COMMONWEALTH
OF PENNSYLVANIA (WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAW PRINCIPLES THEREOF), EXCEPT TO
THE EXTENT PREEMPTED BY FEDERAL LAW, WHICH SHALL GOVERN.
II.6Entire Agreement. The Original Agreement, as amended by this Amendment, constitutes the entire understanding and supersedes
any and all other agreements, oral or written, between the parties hereto, in respect of the subject matter of the Original Agreement or
this Amendment, and embodies the entire understanding of the parties with respect to the subject matter hereof.
II.7Acceptance of Terms. The terms and conditions of this Amendment shall be binding upon the estate, heirs, beneficiaries and other
successors in interest of the Participant to the same extent that said terms and conditions are binding upon the Participant.
II.8Arbitration. Any dispute or disagreement between Participant and the Company with respect to any portion of this Amendment or
its validity, construction, meaning, performance, or Participant’s rights hereunder shall be settled by arbitration, conducted in
Philadelphia, Pennsylvania, in accordance with the Commercial Arbitration Rules of the American Arbitration Association or its
successor, as amended from time to time. However, prior to submission to arbitration the Participant will attempt to resolve any
disputes or disagreements with the Company over this Amendment amicably and informally, in good faith, for a period not to exceed
two weeks. Thereafter, the dispute or disagreement will be submitted to arbitration. At any time prior to a decision from the
arbitrator(s) being rendered, the Participant and the
2
Company may resolve the dispute by settlement. The Participant and the Company shall equally share the costs charged by the
American Arbitration Association or its successor, but the Participant and the Company shall otherwise be solely responsible for their
own respective counsel fees and expenses. The decision of the arbitrator(s) shall be made in writing, setting forth the award, the
reasons for the decision and award and shall be binding and conclusive on the Participant and the Company. Further, neither
Participant nor the Company shall appeal any such award. Judgment of a court of competent jurisdiction may be entered upon the
award and may be enforced as such in accordance with the provisions of the award.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound hereby, have executed this Amendment as of the
day first above written.
STONEMOR INC.
By:
/s/ Austin K. So
Austin K. So
Senior Vice President, Chief
Legal Officer and Secretary
/s/ Kevin D. Patrick
Kevin D. Patrick
3
Exhibit 21.1
Subsidiaries (or Managed Entities*) of StoneMor Inc.
as of December 31, 2021
Subsidiary (or Managed Entity*) Name
Jurisdiction of Formation
Alleghany Memorial Park LLC
Virginia
Altavista Memorial Park LLC
Virginia
Arlington Development Company
New Jersey
Augusta Memorial Park Perpetual Care Company
Virginia
Bethel Cemetery Association*
New Jersey
Beth Israel Cemetery Association of Woodbridge, New Jersey*
New Jersey
Birchlawn Burial Park LLC
Virginia
Bronswood Cemetery, Inc.
Illinois
Cedar Hill Funeral Home, Inc.
Maryland
Cemetery Investments LLC
Virginia
Cemetery Management Services, L.L.C.
Delaware
Cemetery Management Services of Ohio, L.L.C.
Delaware
Chapel Hill Associates, Inc.
Michigan
Chapel Hill Funeral Home, Inc.
Indiana
Clover Leaf Park Cemetery Association*
New Jersey
CMS West LLC
Pennsylvania
CMS West Subsidiary LLC
Pennsylvania
Columbia Memorial Park LLC
Maryland
Cornerstone Family Insurance Services, Inc.
Delaware
Cornerstone Family Services of New Jersey, Inc.
New Jersey
Cornerstone Family Services of West Virginia LLC
West Virginia
Cornerstone Family Services of West Virginia Subsidiary, Inc.
West Virginia
Cornerstone Funeral and Cremation Services LLC
Delaware
Cornerstone Trust Management Services LLC
Delaware
Covenant Acquisition LLC
Virginia
Covington Memorial Funeral Home, Inc.
Indiana
Covington Memorial Gardens, Inc.
Indiana
Crown Hill Cemetery Association*
Ohio
Eloise B. Kyper Funeral Home, Inc.
Pennsylvania
Forest Lawn Gardens, Inc.
Pennsylvania
Forest Lawn Memorial Chapel, Inc.
Indiana
Forest Lawn Memory Gardens, Inc.
Indiana
Glen Haven Memorial Park LLC
Delaware
Haky Funeral Homes, Inc.*
Pennsylvania
Henlopen Memorial Park LLC
Delaware
Henlopen Memorial Park Subsidiary LLC
Delaware
Henry Memorial Park LLC
Virginia
Highland Memorial Park, Inc.*
Ohio
Hillside Memorial Park Association, Inc.*
Ohio
Juniata Memorial Park LLC
Pennsylvania
Kingwood Memorial Park Association*
Ohio
KIRIS LLC
Virginia
KIRIS Subsidiary, Inc.
Virginia
Kirk & Nice, Inc.
Pennsylvania
Kirk & Nice Suburban Chapel, Inc.
Pennsylvania
Lakewood/Hamilton Cemetery LLC
Tennessee
Lakewood/Hamilton Cemetery Subsidiary, Inc.
Tennessee
Lakewood Memory Gardens South LLC
Georgia
Lakewood Memory Gardens South Subsidiary, Inc.
Georgia
Laurel Hill Memorial Park LLC
Virginia
Laurelwood Holding Company
Pennsylvania
Legacy Estates, Inc.
New Jersey
Locustwood Cemetery Association*
New Jersey
Loewen [Virginia] LLC
Virginia
Lorraine Park Cemetery LLC
Delaware
Mark D. Heintzelman Funeral and Cremation Services, P.C.*
Pennsylvania
Modern Park Development LLC
Maryland
Northlawn Memorial Gardens*
Ohio
Oak Hill Cemetery LLC
Virginia
Ohio Cemetery Holdings, Inc.*
Ohio
Osiris Holding Finance Company
Delaware
Osiris Holding of Maryland LLC
Delaware
Osiris Holding of Maryland Subsidiary, Inc.
Maryland
Osiris Holding of Pennsylvania LLC
Pennsylvania
Osiris Holding of Rhode Island LLC
Rhode Island
Osiris Holding of Rhode Island Subsidiary, Inc.
Rhode Island
Osiris Management, Inc.
New Jersey
Osiris Telemarketing Corp.
New York
Perpetual Gardens.Com, Inc.
Delaware
Plymouth Warehouse Facilities LLC
Delaware
Prince George Cemetery Corporation
Virginia
PVD Acquisitions LLC
Virginia
Rockbridge Memorial Gardens LLC
Virginia
Rolling Green Memorial Park LLC
Pennsylvania
Rose Lawn Cemeteries LLC
Virginia
Roselawn Development LLC
Virginia
Russell Memorial Cemetery LLC
Virginia
Shenandoah Memorial Park LLC
Virginia
Sierra View Memorial Park
California
Southern Memorial Sales LLC
Virginia
Springhill Memory Gardens LLC
Maryland
Star City Memorial Sales LLC
Virginia
Stephen R. Haky Funeral Home, Inc.
Pennsylvania
Stitham LLC
Virginia
StoneMor Alabama LLC
Alabama
StoneMor Alabama Subsidiary, Inc.
Alabama
StoneMor Arkansas Subsidiary LLC
Arkansas
StoneMor California, Inc.
California
StoneMor California Subsidiary, Inc.
California
StoneMor Cemetery Products LLC
Pennsylvania
StoneMor Colorado LLC
Colorado
StoneMor Colorado Subsidiary LLC
Colorado
StoneMor Florida LLC
Florida
StoneMor Florida Subsidiary LLC
Florida
StoneMor Georgia LLC
Georgia
StoneMor Georgia Subsidiary, Inc.
Georgia
StoneMor Hawaiian Joint Venture Group LLC
Hawaii
StoneMor Hawaii LLC
Hawaii
StoneMor Hawaii Subsidiary, Inc.
Hawaii
StoneMor Holding of Pennsylvania LLC
Pennsylvania
StoneMor Illinois LLC
Illinois
StoneMor Illinois Subsidiary LLC
Illinois
StoneMor Indiana LLC
Indiana
StoneMor Indiana Subsidiary LLC
Indiana
StoneMor Iowa LLC
Iowa
StoneMor Iowa Subsidiary LLC
Iowa
StoneMor Kansas LLC
Kansas
StoneMor Kansas Subsidiary LLC
Kansas
StoneMor Kentucky LLC
Kentucky
StoneMor Kentucky Subsidiary LLC
Kentucky
StoneMor Michigan LLC
Michigan
StoneMor Michigan Subsidiary LLC
Michigan
StoneMor Mississippi LLC
Mississippi
StoneMor Mississippi Subsidiary LLC
Mississippi
StoneMor Missouri LLC
Missouri
StoneMor Missouri Subsidiary LLC
Missouri
StoneMor North Carolina LLC
North Carolina
StoneMor North Carolina Subsidiary LLC
North Carolina
StoneMor North Carolina Funeral Services, Inc.
North Carolina
StoneMor Ohio LLC
Ohio
StoneMor Ohio Subsidiary, Inc.
Ohio
StoneMor Oklahoma LLC
Oklahoma
StoneMor Oklahoma Subsidiary LLC
Oklahoma
StoneMor Operating LLC
Delaware
StoneMor Oregon LLC
Oregon
StoneMor Oregon Subsidiary LLC
Oregon
StoneMor Partners L.P
Delaware
StoneMor Pennsylvania LLC
Pennsylvania
StoneMor Pennsylvania Subsidiary LLC
Pennsylvania
StoneMor Puerto Rico LLC
Puerto Rico
StoneMor Puerto Rico Cemetery and Funeral, Inc.
Puerto Rico
StoneMor Puerto Rico Subsidiary LLC
Puerto Rico
StoneMor South Carolina LLC
South Carolina
StoneMor South Carolina Subsidiary LLC
South Carolina
StoneMor Tennessee Subsidiary, Inc.
Tennessee
StoneMor Washington, Inc.
Washington
StoneMor Washington Subsidiary LLC
Washington
StoneMor Wisconsin LLC
Wisconsin
StoneMor Wisconsin Subsidiary LLC
Wisconsin
Sunset Memorial Gardens LLC
Virginia
Sunset Memorial Park LLC
Maryland
Temple Hill LLC
Virginia
The Valhalla Cemetery Company LLC
Alabama
The Valhalla Cemetery Subsidiary Corporation
Alabama
Tioga County Memorial Gardens LLC
Pennsylvania
Virginia Memorial Service LLC
Virginia
Weber Funeral Homes, P.C.*
Pennsylvania
WNCI LLC
Delaware
Wicomico Memorial Parks LLC
Maryland
Willowbrook Management Corp.
Connecticut
Woodlawn Memorial Park Subsidiary LLC
Pennsylvania
*Entity is not a StoneMor Inc. subsidiary, but is managed or operated by contract with a StoneMor Inc. subsidiary
Exhibit 23.1
CONSENT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated March 31, 2022, with respect to the consolidated financial statements included in the Annual Report of
StoneMor Inc. on Form 10-K for the year ended December 31, 2021. We consent to the incorporation by reference of said report in the
Registration Statement of StoneMor Inc. on Form S-8 (File No. 333-250154).
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
March 31, 2022
Exhibit 31.1
CERTIFICATION
I, Joseph M. Redling, certify that:
1.
I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the “Annual Report”) of StoneMor Inc.;
2.
Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered
by this Annual Report;
3.
Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this Annual Report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this Annual Report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Annual Report based on such
evaluation; and
(d)
Disclosed in this Annual Report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 31, 2022
By:
/s/ Joseph M. Redling
Joseph M. Redling
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION
I, Jeffrey DiGiovanni, certify that:
1.
I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the “Annual Report”) of StoneMor Inc.;
2.
Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered
by this Annual Report;
3.
Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this Annual Report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this Annual Report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Annual Report based on such
evaluation; and
(d)
Disclosed in this Annual Report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 31, 2022
By:
/s/ Jeffrey DiGiovanni
Jeffrey DiGiovanni
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code), the undersigned officer of
StoneMor Inc. (the “Company”), does hereby certify with respect to the Annual Report on Form 10-K for the year ended December 31, 2021 (the "Annual
Report") that:
1.
The Annual Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: March 31, 2022
By:
/s/ Joseph M. Redling
Joseph M. Redling
President and Chief Executive Officer
(Principal Executive Officer)
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the
United States Code) and is not being filed as part of the Annual Report or as a separate disclosure document.
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code), the undersigned officer of
StoneMor Inc. (the “Company”), does hereby certify with respect to the Annual Report on Form 10-K for the year ended December 31, 2021 (the "Annual
Report") that:
1.
The Annual Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: March 31, 2022
By:
/s/ Jeffrey DiGiovanni
Jeffrey DiGiovanni
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the
United States Code) and is not being filed as part of the Report or as a separate disclosure document.